Emerging Markets Lead The World In Global Economic Recovery

02.02.10

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Emerging markets performed well in 2009 and continue to lead the world in the global economic recovery. Their economies are growing faster than industrialised ones, boosted by the increasing dema

Emerging markets performed well in 2009 and continue to lead the world in the global economic recovery. Their economies are growing faster than industrialised ones, boosted by the increasing demand for infrastructure, property and commodities, and as the expanding population – in particular the middle classes – develop Western tastes.

During 2009, the MSCI Emerging Markets index increased 73% in 2009. China's CSI 300 composite index rose 89% while the Shenzhen Stock Index increased by 115.27%. Russia?s blue-chip Micex rose by 118%, Brazil's Bovespa rose 80% and India's Sensex 80%. The Indonesia Stock Exchange closed with the stockmarket index up 85%.

Over the last decade the four major emerging markets of Brazil, Russia, China and India – known collectively as BRIC – have charged ahead posting double or triple gains. For example, India?s Sensex index leaped more than 240% while on Ukraine?s PFTS Stock Exchange, shares rocketed 1,350%. Stocks leaped more than 660% in Peru.

According to fund tracker EPFR Global, equity funds in emerging markets attracted a record $80.3 billion in 2009, surpassing their previous high of $54.4 billion in 2007. It was the highest inflow since EPFR began tracking data in 2007. The BRIC economies attracted the largest investor interest accounting for around $60 billion of this influx.

Merrill Lynch predicts that emerging market economies will grow 6.3% in 2010, compared to 4.4% by the global economy. Emerging markets accounted for most of 2009?s growth in global output and are expected to account for 70% to 75% of this growth for some time.

China

China?s economy is expected to grow around 9.5% in 2010. The country?s 4 trillion yuan stimulus ($586 billion) package and record rise in bank lending pushed the economy to 8.9% growth in the third quarter of 2009. Real estate investment could grow by 30% to 40% over 2009 and “become a main force driving investment growth,” said a report by the State Council Development Research Centre.

China?s output grew at a record pace in December. The official purchasing managers? index (PMI) rose to 56.6 from 55.2 in November, reaching its highest level in 20 months. A reading over 50 indicates an expansion in manufacturing activity.

China's manufacturing PMI will likely remain above 50 and even accelerate in coming months, as exports are improving, private investment is coming back and public investment remains robust,” an economist at Bank of America-Merrill Lynch wrote in a research note.

China has been spending heavily on infrastructure since the latter part of 2008 attracting investment in factories and property. Its huge demand for commodities has led to China owning copper, uranium, coal and iron ore mines as an investment against the inevitable rise in cost of commodities in the future.

Brazil

Investment in Brazil continues to grow. The 2016 Olympic Games is expected to further boost investment with the government already committing around $11 billion on infrastructure for the event. According to Brazil?s finance minister, Guido Mantega, the Olympic Games will add 1% to the country?s gross domestic product in coming years, and the 2014 Soccer World Cup will also add 1%.

Since the latter part of 2008 all three major ratings agencies have upgraded Brazil?s investment grade.

India

India is expecting to spend around $1.5 trillion on infrastructure over the coming five years. It has a thriving middle class who are acquiring tastes of the Western world.

Manufacturing activity hit a seven month high in 2009. India's PMI rose for the first time in three months in December to 55.6, from 53.0 in November, the highest level since May.

Russia

Russia is being tipped as one of the most appealing emerging markets for 2010 with the nation?s oldest investment bank, Troika Dialog, predicting that equities will rise by about 40%. Over the last ten years Russia has paid the biggest returns, finishing 2009 at around 800% having soared pass the 1,000% the year before.

Are emerging markets really a good place to invest?

The HSBC Emerging Markets Index jumped to 56.1 in the final quarter of 2009, the fastest rate since the fourth quarter of 2007. The Index indicates that emerging markets are a leader in the global economic recovery. Output and new orders are accelerating and manufacturing exports show the largest gain for nearly five years.

HSBC?s Chief Economist, Stephen King, said: ?The data shows that the trend we first identified in October 2009 is gaining momentum – emerging nations are going from strength to strength and a global recovery is likely to be emerging markets-led. Drivers of the global economy continue to shift to the East and we are seeing emerging nations becoming increasingly dependent on each other rather than on the economies of developed countries.?

According to research by UBS in December, emerging market equities are expected to deliver returns of around 15% this year, although it warned they will be one of the more volatile asset classes. In comparison, UBS predicted returns of approximately 10% for developed market equities.

As attractive as investing in emerging markets sounds, it should be considered as a long-term investment and just part of a well diversified investment portfolio since they carry a higher risk. Overall, your portfolio should cover a wide range of countries and sectors as well as a mix of asset classes to balance risk. Talk to an established financial and wealth preservation firm like Blevins Franks to advise you on an allocation which suits your objectives and risk tolerance.

By Bill Blevins, Managing Director, Blevins Franks

11 January 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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