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The Game Has Changed In Investing… Have You?

It’s a gloomy Saturday evening in November. The depressing events in Paris seem to have punctured the world’s enthusiasm and hope. While the rain pours down outside, I have to write an article about investing.

Even in the world’s stock markets, the mood seems despondent. Crashing share prices have left equity markets in some sort of malaise.

The final throes of the global bear market

This is the final throes of the global bear market. After the euphoria of the 1990s, we had the tech crunch, and then the Credit Crunch. This third leg of the bear market seems to have no obvious cause. I think the enthusiasm of investors and fund managers has been so exhausted that share prices have just fallen anyway, almost out of habit.

However, seasoned investors will realise that, amongst the debris of these crashing markets, lie the seeds of the next great bull market. As the saying goes, people make their money in bear markets — they just don’t know it at the time.

Let’s peer into the gloom to see what shape this bull market takes. The last great boom in shares was focused on America. Driven by tech and by the banks, stock markets in the US and Europe surged ever higher. In contrast, emerging markets were laid low by the Asian crisis of 1998.

Fast forward to today and, well, the world has changed. We live in a low-cost, deflationary, China-centric world. Manufacturing jobs have moved en masse to the Middle Kingdom. The Chinese have invested billions in infrastructure, homes and factories. The momentum that they have gathered is more than a little frightening.

Suddenly the world has a surfeit of production capacity, and no other country can compete. That means that prices have tumbled and inflation seems already to be a problem of the past. Across America, from Atlanta to Chicago offices are being closed and factories mothballed.

The pricing power of many companies has all but disappeared. Tesco and Sainsbury’s are finding that they are being undercut by a host of new competitors such as Aldi and Lidl. Firms are having to rip up their business models and start again.

Thinking of giving up? Just wait a moment.

It’s all enough to persuade a lot of investors to give up completely, sell their shares and invest in buy-to-let instead. But, just wait a moment.

Some companies are adapting incredibly well. Unilever realised 20 years ago that its future lay in emerging markets. Fairly soon most of its profits will be made in countries like India and China. Sector peers such as Reckitt Benckiser are following suit. But this is a world where you will have to pick your blue-chip and small-cap investments very carefully.

Its interesting to note how cheap emerging market funds are currently. Fidelity China Special Situations currently has a discount of 14.7%, while JP Morgan India has a discount of 10.5%. Vietnam Holdings has a discount of 13.4%.

Gone are the days when it would be enough to buy a standard basket of blue-chip UK companies, along with the occasional US name. You need to follow the growth, and the momentum. This means investing in emerging markets.

So, have you got it now? Like it or not, the world now revolves around China. Buy into the right funds and shares, and in a decade’s time I believe you will have forgotten about your recent losses, and will be sitting pretty.

The investing game has changed completely. Have you?

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Prabhat Sakya owns shares in Fidelity China Special Situations and JP Morgan Indian Investment Trust.. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.