Investing in Emerging Markets
With astute asset allocation and sensible diversification being fundamental principles of successful investment and long term wealth creation, one of the key challenges for investors is having an awareness and understanding of what's available to invest in, and the level of risk and return you could realistically expect over time from such investments.
One asset class that’s relatively overlooked by Australian investors, when compared to say, Australian shares or property, is investing in the shares of companies based, and conducting most or all of their business, in so-called ‘emerging markets’.
Definitionally, it’s a bit of a rubbery term, but generally, an emerging market (or emerging economy) is one considered to be in a state of generally rapid growth and industrialisation, and having a low- to middle- per capital income as measured by the World Bank.
Investment intelligence and index provider MSCI currently classifies 21 nations as emerging markets, with the list including China, India, Korea, Thailand, Taiwan, Russia, Turkey, Greece, Hungary, South Africa, Brazil, Chile and Mexico. MSCI’s Emerging Markets index covers over 800 securities across these 21 nations, and represents approximately 11% of world market capitalisation.
Over the last five years, the MSCI Emerging Market index has recorded an annualised return of 11.31% over five years, or 7.08% over 10 years. MSCI’s South East Asia index has shown an annualised return of 19.34% over five years, and 9.31% over 10 years (as at 21 March 2014).*
According to ipac financial planner Paul Clitheroe, “The easiest way to invest in emerging markets is through a managed fund. Be warned though, high returns means high risk, and emerging markets can be volatile – in fact there have been serious emerging market losses in the last three years.
“It pays to only devote a small part to your portfolio to emerging markets, due to the higher risk – however it can be a valuable and viable asset class for investors taking a long term approach”, Clitheroe said.