MR MONEY MAKER: Emerging markets are long-term wealth creators

What’s happening? 

The stock markets, unsurprisingly, got themselves into a terrible tizzy last year as they tried to make sense of what the effects of the pandemic would be. 

As a result, fund managers around the world sold off over £31.8billion of emerging market investments. Then, like sheep, poured £72.4billion back in again. 

During this time, we also saw a growth in the ‘developed’ markets of nearly 12 per cent, leaving the emerging indices still gaining but at a significantly slower rate of around 6.8 per cent. 

Looking ahead: Longer-term wealth creation is going to be in the developing and emerging economies

Most recently we have seen emerging markets buoyed by rising basic commodity prices. Importantly, you should not regard the term ’emerging markets’ as a bland, magnolia-coloured can of emulsion covering them all – this is patronising rubbish as they are all very different. 

Why does it matter? 

Longer-term wealth creation is going to be in the developing and emerging economies. Developed countries, including our own, will buy their exports and invest in these countries. But it will be in emerging markets that we see the better growth and long-term returns. 

We can divide emerging markets into different categories. First, you have the commodity providers, usually of mined products. So here we can lob in South Africa, Brazil, Indonesia (palm oil) and Russia. Yes, I still call Russia ’emerging’ – remember, the entire economy of that vast nation is less than 45 per cent of the UK’s! 

Then you have countries where the middle class is growing, including India, China, Mexico and, again, Indonesia.

What should I do? 

The term ’emerging market’ covers a very broad range, and we should not think of them en masse but consider the individual potential rewards and risks.

If you think that after the pandemic the global economy will not merely bounce back to where it was, but return to a more reliable growth path, then a commodity fund can be useful. The price of oil has risen to over $73 per barrel. Only two years ago it was close to nought! Mutter from the gutter is telling me that traders expect a potential rise to $100, but that is quite a tall order. 

These rising costs will feed into inflation and we are already seeing central bankers considering interest rate rises – but not likely this year – which could put a kibosh on much of the current market pricing. 

The other theme is the rise of the Oriental consumer and that is likely to grow, especially in areas with a growing middle class.

Any suggestions? 

For a low-cost commodity price tracking fund the Invesco Bloomberg Commodity UCITS ETF provides a good entry and covers the asset class well. 

For a more specific focus on an area where there is a growing middle class then Asean (Association of Southeast Asian Nations) fits the bill. There is an Asean-specific fund – the Global X FTSE Southeast Asia ETF. 

Both are good investments, but they must be put in the longer-term folder to get the real value of the growth in these sectors. 

Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally.