“Emerging markets are no longer peripheral; they account for 50% of all economic activity on the planet,” says Jerome Booth, Head of Research at Ashmore Investment Management.
The current scenario we are living in is quite appalling. Credit is shrinking in developed economies, banks are afraid to lend and customers are frightened to borrow. The developed world looks to be in a pretty bad state, but this is quite the opposite for the ‘developing’ world, also known as the “Emerging Markets”.
In a report conducted by Goldman Sachs this week it discusses that while credit contracted by 1 per cent in a typical developed country last year, in a typical EM it grew and by an extraordinary 11%. Now doesn’t that sound attractive?
But, the story remains the same for emerging markets. In spite of volatility and the risks we hear about investing in emerging markets, institutional investors still have a keen appetite for them.
Looking back during 2010, a survey conducted by a leading hedge fund, GLG said “there has been a paradigm shift…There could be volatility in the near term, but over the long run the emerging markets should outperform”.
During February 2005, Emerging Portfolio Fund Research, a US based data noted emerging market equities hit a record high with net buying of emerging market equities reached $1.3bn in the week of February 9, which was the biggest inflow since 2000. Again, it appears investors thoughts still haven’t changed.
You may be thinking; but emerging markets also have experienced times of lows and slumps? For example, during May 2006, when emerging market equities were disproportionately sold and experienced their worst losing streak since the 1998 Russian debt crisis. But even so, emerging markets bounced back strongly. This was due to abundant liquidity on global markets and high risk appetite among international investors. Even if they do slightly drop in comparison to the Eurozone and US, they are still appear to be a more attractive investment.
Interestingly, it’s not just about institutional investors investing in emerging markets. With China growth sky rocketing, Osborne argued this week that Britain must recognise the growth of Asia as an opportunity for the West rather than a threat, and that it must work harder to break into its massive market. Following George Osborne’s discussions earlier this week urging Chinese investors to put money into British transport energy and utility projects, today it was announced China Investment Corporation (CIC), the country’s sovereign wealth fund, has bought 8.68% of the company behind UK utility group Thames Water. We are now in a scenario where we are not only investing in emerging markets, but we are also looking to emerging markets to invest in us.
The push for emerging market investment is likely to persist and its attractiveness to remain. So what will the story be in 10 years time or even 20 years time? Will emerging markets still remain as attractive as they are today? With news of Chinese growth hitting 8.9% in the fourth quarter, a negative outcome (or story) looks unlikely.