Emerging stock markets not necessarily the best route for investors, report suggests

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Written by Ray Clancy

Tuesday, 21 September 2010 10:20

Emerging stock markets are not always the best route to gaining access to structural trends in developing economies as companies in developed markets, emerging market sovereign and corporate bonds and high yielding market equities can all play a role, it is claimed.

In the latest edition of Global Perspective from Standard Life Investments, the global fund manager argues that after decades of globalisation, where we invest is becoming less important than what we invest in.

Increasingly, investors need to understand the complex linkages and relationships between emerging and developed markets, it says. The report highlights, for example, that, at the market level, about 20 to 25% of FTSE100 and S&P500 revenue is derived from emerging markets. This makes it perfectly possible to achieve a significant exposure to developing economies while investing in familiar names such as Unilever, Nike and Heineken.

Many of the old arguments for avoiding emerging markets have been turned on their heads in recent years and concerns in other key areas are diminishing, the report points out.

The generally healthy balance sheets of emerging market consumers, corporates and governments are in sharp contrast to those in the developed world. There have been structural reforms to markets, and the cost of researching and trading in emerging market companies is reducing, although it is still more expensive than in developed markets, it adds.

‘The tremendous opportunities associated with emerging economies are not wholly in the emerging stock markets. Other investment routes should be examined,’ said Frances Hudson, global thematic strategist at Standard Life Investments.

‘For example, to benefit from trends such as the growth in emerging market consumption and increasing brand awareness, investors may do better to hold a mix of developed and emerging market consumer facing stocks than just buying emerging market shares,’ she explained.

‘Income oriented investors should consider both emerging market corporate bonds and higher yielding Asian equities as another source of sustainable yield, it suggests. While emerging market bonds still offer an additional premium for sovereign risk, it is not clear that the same applies to emerging market equities,’ she added.

‘Rather than debating the decoupling between countries and regions, we would recommend looking closely at the evolving business relationships and trading patterns and identifying the beneficiaries on both sides. In conclusion, the tremendous opportunities associated with emerging economies are not wholly in the emerging stock markets,’ she concluded.