By: Bill Blevins
Financial Correspondent, Blevins Franks
IT HAS been the norm to plump for the known and reliable markets of the US, UK and more recently Continental Europe as a way of diversifying an investment portfolio on a global scale. But attitudes are changing in the investment world.
Emerging markets, with their potential for exciting long-term profits, are becoming more popular. Many investors now include emerging market equities or bonds (or both) in their portfolio.
Emerging markets used to be somewhat of a mystery to some individual investors in the past. Vague information about countries they were not familiar with, with no positive economic track records, may have caused people to steer clear. And at times, some of the countries did deserve their reputation of being risky, from an investment point of view.
Times have changed, though, and with many countries on an upward economic path and greater resources to research these countries with, emerging markets have become a viable investment, provided you take the right approach.
BRIC
Emerging markets can be defined as being outside the mainstream major economies of the world. They are developing countries or ones having experienced a time of economic volatility and instability, such as South East Asia, South America and Eastern Europe. They are low to middle income nations.
These areas are gradually enjoying investment and their economies are growing faster than that of the developed nations. For example, following the economic crisis in Argentina, in the late 1990s early 2000s, the stockmarket grew by 880 per cent in one year.
Today’s leading emerging markets include some of the world’s largest, or most populous, or even resource rich countries like Brazil, Russia, India and China, which are rising dynamic economies, collectively known as BRIC.
A survey released by The Economist reveals that developing economies now produce in excess of 50 per cent of the world’s GDP and that their share of the total world economy is growing rapidly. The World Bank has stated that emerging countries will grow more rapidly than those of the developed world in decades ahead.
However, popular emerging markets are becoming as an asset class, they should not be considered as part of your investment portfolio until you and your financial adviser are confident that your portfolio is stable, with a well-balanced diversification across other asset classes. Normally, a well-balanced portfolio would include a mixture of equities, bonds, cash and property funds, spread across varying risk levels.
Bond funds
For most people, the emerging markets allocation to your portfolio should be between five per cent and 10 per cent – just a small proportion but the potential for dynamic movements are far greater than what can be expected from the more stable US and UK markets.
The prospect of high returns are usually based on higher risk but this modest asset allocation, if held long-term (ideally for 10 to 15 years), can grow to more than 50 per cent of the value of your portfolio, or even be worth, in whole, more than the rest of your portfolio put together.
Thorough research and extensive knowledge of the fundamentals driving each country is needed before selecting which emerging markets to buy into, whether you are buying equities or bonds. It is therefore advisable to buy shares in an equity or bond fund, rather than individual stocks and shares. These funds are well diversified to include different geographical areas, sectors, industries and currencies.
You can include both emerging market equity and bond funds in your portfolio, but if you are not comfortable with the risk associated with emerging market equities, a suitable bond fund is an alternative and lower risk way of investing in this market.
Bonds are called fixed interest investments and are issued by countries and companies to raise capital. An investor lends the country or company a sum of money towards its capital, over a set period of time, and in return receives a fixed rate of interest and the original outlay when the bond matures.
Look for a bond fund where the management team has a proven track record and is research driven. Ideally, it would invest in 10 to 20 different countries, including corporate bonds, sovereign (government) bonds and local currency bonds. Some funds, including global sovereign funds have high yield bonds from stable, non-emerging market countries, to lower the risk level.
Bond funds are managed by experts in their field, who track the countries’ performances and economic prospects and will make necessary additions or deletions to achieve the best out of the bond fund. Managers of emerging market bond funds will target for yields of between nine per cent and 10 per cent per annum, over the longer term and higher returns are possible.
Opportunities
No matter how expertly and well constructed an investment portfolio is, adding a touch of vision will spice it up provided you are prepared to weather any possible downturns along with the potential for large gains.
Today’s widely diversified and sophisticated investment world offers opportunities for you to benefit from emerging market investments, without taking on prohibitive risk levels, and with the right advice and structures the results can be very rewarding.
Note that past performance is no guarantee for future success, and the value of these funds can go down as well as up so that you may not get your starting capital back.
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