A growing chorus of analysts is singing the praises of investing in emerging markets. But many remain largely untapped by Canadian investors.
On a recent speaking tour in Vancouver, Gavin Graham, global strategist at Excel Funds, suggested emerging markets continue to be a relatively small portion of people’s portfolios, even though markets in countries like Brazil, Russia, India and China (BRIC) are where most of the world’s economic growth and development is.
“A large number of investors acknowledge that the underlying economic case for investing in emerging markets is pretty strong,” said Graham. “But, nevertheless, their exposure to it is still very low.”
According to Fundata, the assets of Canadian emerging market funds total roughly $6.5 billion. That’s about 10% of what Investment Funds Institute of Canada says is the $611.5 billion of net assets in Canada’s mutual fund industry as of August 31, 2010.
Graham said investors remain uncomfortable investing in unfamiliar markets, especially those that are highly volatile, which many emerging markets are. He also noted that many emerging markets remain inefficient because their information flows far less evenly and smoothly compared with more developed markets like those in North America and Europe.
However, those issues can be partially overcome by fund companies offering experienced portfolio managers in the markets where they invest.
“Some people say, ‘Why don’t I just trade in an exchange-traded fund in emerging markets or India or China?’ And certainly you can get a benefit from investing that way. But at the same time, because these markets are not particularly efficient, active managers have been able to deliver value.”
He noted a popular strategy to tap emerging markets is to invest in Canadian or other multinational firms that operate in developing economies, including BRIC countries. He notes, however, that method can miss the growth of local medium-sized companies that can provide strong absolute growth.
“You tend to have quite good revenue growth in companies of all sizes, but obviously, if you’re medium rather than large, you’re growing a little bit faster.”
While an investor’s objectives and time horizon will largely dictate whether emerging markets are appropriate, Graham said they should be considered an important investment component for people looking for significant growth in their portfolios.
“If you’re investing in markets that aren’t correlated with your own market, that don’t move in the same direction, at the same time, and you have good underlying growth, as is the case for emerging markets, it’s probable you will be able to get good returns while reducing your risk.”
Craig Alexander, senior vice-president and chief economist for TD Bank Financial Group, said in a recent interview that investors should be keeping an eye on emerging markets.
“What we’re seeing is a two-speed economic recovery,” Alexander said. “Emerging markets are booming, with China, India and Brazil all on fire. If there’s a risk out there for these economies, it’s not that they’re going to stumble. It’s that, if anything, their growth rates are too strong and start running risks of asset bubbles.”
Alexander doesn’t share the concerns of some analysts that government efforts in India and China to slow down their economies will be too effective.
“It worries people that things are slowing down in these economies, but we need to understand that it’s not in anyone’s interest to have boom-bust cycles. It’s far better if their growth comes down a bit.”