Long Term Investment In Emerging Markets

By M. Isi Eromosele

Profound structural changes in emerging countries during the past two decades have made them a key contributor to world economic growth. As a reflection of this transformation, the number of investment opportunities in terms of markets and companies listed has increased considerably. As a percentage of world market capitalization, emerging countries now account for more than 18 per cent, and this share is continually growing.

Portfolio flows into emerging markets have reflected the above trends as investors continue responding to both the increased opportunities and the strong relative investment returns of the past several years. The majority of emerging market flows has been directed to customary active investment methods - methods that rely on in-depth research of countries in order to identify tactical or short term opportunities. Since these are some of the world’s most volatile equity markets, quality research should be conducted that would create information advantages and enhance performance.

A long-term commitment to the emerging markets via a third investment strategy is needed: a disciplined rules-based or structured approach. Such an approach will result in a sustentative improvement overall, and serve as a compliment to both conventionally active and passive strategies. The equity markets of developing countries are exceptionally well suited to structured portfolio management. This approach to asset management incorporates ideas such as equal weighting, systematic re-balancing and diversified economic sector and stock allocations within countries.

Risks and Rewards

Opportunities

Higher Growth Rates: For a long period of time, emerging markets have continually achieved higher long-term economic growth rates than those of the developed world. The BRIC countries (Brazil | Russia | India | China) have seen their GDPs substantially rise as a percentage of the world’s. Looking forward, it is predicted that by 2050, 7 of the top 10 world economies would be in countries that are currently in emerging markets today. The success of the past several years and the growth tangent projected for the economies of these countries is soundly supported by substantial improvements in key economic metrics such as inflation, fiscal policies, robust foreign exchange reserves and net direct investments.

Low Valuations: An additional incentive to the return potential of emerging markets is the relative cheapness in terms of evaluation basis. While trailing price to earnings ratios in the United States are between 17 and 18, developing countries as a whole show a ratio between 14 and 19, excluding the recent boom in Asian emerging economies, this can be lowered to between 14 and 16. There is also sufficient evidence that supports an emphasis on the smaller vs. larger emerging markets within a diversified portfolio - p/e ratios are lower, historical returns have been higher.

Low Correlations: Emerging markets offer meaningful diversification to a global portfolio due to their relative low correlations to other emerging markets and the markets of developed countries.

Risks

Political and economic shocks should be anticipated, but are difficult to predict. In 2007, investors dealt with dramatic volatility in China when on two occasions, the Shanghai stock market dropped by 8.84 per cent and 8.26 per cent respectively. Despite these two large single day sell-offs, the same index ended 2007 up over 96 per cent. Despite this type of challenges, emerging markets offer a multiple of investment opportunities.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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