Rewards in smaller markets
The booming economies of China and India as well as Brazil and Russia are well known (as BRIC). Together they represent 40% of the world's population and 25% of land coverage. But what do investors know about the smaller emerging markets?
For a start, there are plenty of emerging countries that have been performing substantially better than the BRICs since January 1997.
Which booming countries? They include Chile, Columbia, Czech Republic, Egypt, Hungary, Israel, Peru, Poland, the Philippines, Thailand and Turkey.
Why do investors need to consider investing in emerging-market countries? They represent 14% of global equity markets.
"Many of these economies offer value, growth and solid profitability," says Chris Laine, portfolio manager for active emerging market equities at State Street Global Advisers. "Many of the smaller emerging and frontier economies have quietly been making investor-friendly reforms and deserve the attention of international investors."
The forecast gross domestic product (GDP) growth is 4% to 5% greater than the G10 (10 major developed) economies, says Laine. He says investors, while maintaining a core exposure to the BRICs, should not close their eyes to other growth in the emerging world.
Research shows that the stocks of emerging markets trade at 11 times forward earnings, suggesting that the broad emerging market asset class is not in a bubble.
"While it is true that emerging markets no longer trade at a significant discount relative to developed markets, it is hard to say that an asset class trading at 11 times forward earnings is in a bubble. This is right in line with its seven-year average, "says Laine.
"Developed markets still offer the diversification, liquidity and transparency that investors require.
"However, if we continue to see emerging markets further develop and become more transparent, the argument to award emerging markets a premium will be compelling.
"On a short-term basis, emerging-market equities do have a higher degree of volatility, but if we think about longer-term systemic risks, emerging markets appear to us to have more favourable characteristics. Lower government debt burdens and healthier consumers suggest that emerging markets will continue to attract capital."
Get stories like this in our newsletters.
