FOOL'S EYE VIEW
Should You Invest In Emerging Markets?

By Maynard Paton (TMFMayn)
December 12, 2001

Carburton Street, London -- Should you invest in emerging markets? For most investors, it's not a question of whether you should invest in emerging markets, but rather "how much are you currently investing?" If you contribute to a low cost index tracker, or hold a widespread portfolio of blue-chip shares, you're already an emerging market investor.

Emerging attraction

But what are emerging markets? And what are their attractions to investors?

When it comes to global stock markets, the 'emerging market' term essentially covers every country apart from the United States, Canada, Japan, Australia, New Zealand and most Western European nations. And the investment attraction of these emerging countries is simple. Given the opportunity for their economies to expand at a rate greater than the 'mature' economy of a developed country, there is a chance of faster stock market growth.

However, by their very nature, less developed countries do court greater political and financial risks. For instance, in the past few years, we've seen currency crises in Mexico, Russia, a bunch of Asian countries, and just recently, in Argentina. Needless to say, such economic problems don't do much for a country's stock market!

But the various investment risks do not stop financial organisations promoting their specialist emerging market funds. Indeed, such products are invariably sold as part of an overall 'diversification package'. For example, an adviser may suggest to his client that he split his portfolio so that he has 40% invested in UK funds, 40% invested in US funds and 20% invested in emerging market funds.

Furthermore, certain 'emerging themes' evolve from time to time, too. And the glamour of a distant stock market growth story can be irresistible for some. For instance, following the fall of the Berlin Wall, Eastern Europe became, for a time, a popular hunting ground for UK investors. And of course, there's China, the perennial favourite of investors hoping for long-term international growth.

(On that 'growth' note, it's worth reflecting on investing fads. If you're reading stories about 'the next great overseas investment opportunity', beware. It'll almost certainly cause your portfolio some heartache.)

Divergence

The figures in the back of a recent Money Management magazine highlight the disparate performance of specialist emerging market funds. For instance, when looking at global funds, £1,000 invested in the Aberdeen Frontier Markets unit trust five years ago would now be worth £1,370. However, £1,000 invested in the INVESCO Perpetual Emerging Countries unit trust five years ago would now be worth £553.

The divergence in performances is also found in specific market areas. For example, the Henderson Pacific Capital Growth unit trust, which focuses on Asian countries other than Japan, has turned £1,000 into £2,752 over the past ten years. But although it has the same geographical remit, the Lincoln Far East unit trust turned £1,000 into £822 during the same period.

All in all, the usual risks associated with managed funds (high charges, the talented fund manager walking out and so on), combined with the increased possibility of political and economic problems, ensures disappointment is a definite possibility for the emerging market fund investor.

For those still tempted with the allure of far-away stock market riches, the best way for emerging market exposure is to consider large, familiar, global companies. Here's a dozen FTSE 100 stalwarts with varying degrees of emerging market profits.

Company                  Percentage of profits generated
                             outside Europe and USA

Anglo American                       87%
BP                                   25%
British American Tobacco             38%
Diageo                               25%
Glaxo                                23%
HSBC                                 51%
Reckitt & Benckiser                  10%
Six Continents                       18%
South African Breweries             100%
Standard Chartered                   85%
Unilever                             32%
WPP                                  19%

Those twelve companies may not set your portfolio on fire. But over time, they will give you exposure to the long-term economic progress of various emerging markets -- without taking on board the full-on dangers of a specialist fund.

In short, it would probably pay investors to forget all about emerging market funds. Sure, there may be a fund manager somewhere who has a 'hot hand' for small companies in Latin American. But in most cases, limiting your contact to emerging markets through FTSE 100 blue chips will carry far less risk than a specialist fund.

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