Are there still any safe havens for 'buy and hold' investors? One fund manager reckons that emerging economies are the answer...
Is a world of stuttering shares and plunging property prices, are there any real safe havens left for ‘buy and hold' investors?
Or to put it another way - even allowing for more market turbulence while credit conditions sort themselves out - what looks like a genuine long-term bet?
I went over to Legal and General Investment Management to hear the thoughts of their strategy gurus.
Their conclusion: go for emerging economies, stay in commodities. And keep out of both the UK and the US.
What's good about the emerging world? We are conditioned into thinking that when the US sneezes, the rest of the world catches a cold. And at the moment, American home owners have contracted a negative equity epidemic whose effects have spread far and wide around the world's banking system.
The States is in a right state. Also, the idea of ‘de-coupling', where emerging economies largely disconnect from the travails of the developed world, has recently been exploded by the subprime fallout. In 2008, almost all the world's share indices have dropped more than the Dow Jones Industrial Average.
Yet looking further down the road, the strategists at Legal and General see a different story unfolding. They believe that emerging economies will increasingly be able to stand alone.
The proportion of world exports heading for the US has been declining sharply, collapsing from almost 50% in 2003 to the current level of just over 10%. Yet over that period, those manufacturing maestros in Germany managed to boost their overall exports by almost 60%.
Where did all these goods go?
Answer: places like Brazil, India and China.
Annual inflation-adjusted credit expansion in emerging economies is currently escalating at around 27%, up from 6% six years ago. Domestic demand has steadily accelerated over that period into generating some 90% of annual output growth.
How's this for an example: in 1998, Chinese new vehicle sales were just 10% of America's. Now they are more than 2/3rds of the level achieved in the United States.
Hence dramatic gains in many commodity prices, including oil which has powered upwards despite American recession fears.
In other words, the L&G view is that many of these countries should be quite capable of enough internal momentum without needing to worry about what the US Federal Reserve gets up to.
Hang on though, you say, isn't this just another over-inflated bubble waiting to burst? Don't many emerging economies tie their currencies closely to the US dollar, so that their own interest rates and exchange rates are being held far too low?
Well, yes, to a degree. Inflation is rearing its ugly head round the world. Overheating economies could drive consumer price rises out of control, with more food riots on the menu.
How can the authorities restore both economic and civil order?
Hike domestic interest rates to levels that will choke off excess credit, and will claw back internal expansion to a more sustainable plane. And break the link with the dollar, allowing exchange rates to move in line with market forces.
Net likely result: a major appreciation in the currencies of Brazil, India, China and others as the policies take hold. Stock markets in these regions could also do well, although a combination of more constrictive policy measures and higher exchange rates is likely to curtail profit growth.
Will commodity prices continue rising? Yes, according to L&G, though their analysis implies there may be a shorter term dip.
Meanwhile life will be getting much tougher for the poor old consumer in both the States and Britain. Both the dollar and the pound will be in (terminal?) decline, reducing purchasing power and pumping in ever more inflation.
Yet the emerging world will never have had it so good.
And the best way to take advantage?
In my view, it's worth looking at the London Stock Exchange listed range of ETFs (exchange traded funds - investment vehicles generally based on recognised indices). The DB MSCI Latin America
(LSE: XMLA)
, launched in September 2007, is the first ETF to offer investors access to all of Latin America.
But we're getting onto a whole new subject here and space is running short. More on this soon!
