Category Investments

With the right approach, global emerging markets offer good investment growth potential

16 March 2015 Feroz Basa, Old Mutual Investment Group

Significant GDP growth is expected for a number of emerging markets over the coming 10 to 15 years, pointing to potentially stellar emerging market growth. This is according to Feroz Basa, Co-Head of Global Emerging Markets for Old Mutual Investment Group.

He says that investors who avoid Global Emerging Markets due to their perceived risks are losing out on significant growth opportunities, particularly given that many of the historical challenges of emerging market investment can be mitigated by a focus on good governance and a long-term view.

Basa contends that, despite the muted relative returns of global emerging markets over the past two years, investors who use these historical performance figures as a reason to ignore this investment class in favour of an SA-only approach are doing themselves, and their portfolios, a disservice.

“While a general reticence to get involved in global emerging markets is understandable given the rigours and risks they present,” he explains, “a blanket refusal to consider such investment means investors stand to miss out on the vast and largely inexpensive long-term opportunities that qualified shares in emerging markets now present.”

Emerging Markets have recently seen a slowdown in growth, plagued by factors such as the threat of US monetary policy tightening and a prolonged slump in commodity prices.

However, Basa argues that even if you strip out three quarters of the available universe of global emerging market investment opportunities, you would still be left with around 1 000 investable shares, which is almost 10 times the investment options that are available via a purely SA-based fund.

In addition, pointing to a rising general consensus that significant GDP growth is likely for a number of emerging markets over the coming 10 to 15 years; he says this analysis is supported by the recent findings of Citi Investment Research and Analysis that put no less than six emerging market countries in the top 10 GDP regions by 2030.

“Against this backdrop of good price to earnings ratios and potentially stellar emerging market growth, the returns that could be derived from a global emerging markets investment approach simply cannot be ignored,” he points out.

But Basa is also quick to explain that unlocking these emerging market investment returns won’t be without its share of challenges, particularly given that, irrespective of their GDP growth success over the next decade, most emerging markets will remain prone to a variety of investment risks ranging from political instability to economic volatility.

He argues, however, that while these risks are very real, many of the historic reasons for emerging market underperformance have largely been, or are being, addressed. This, he says, is paving the way for sustainable investment growth potential in the future, provided investors ensure their investment approach is founded on a long-term view and a non-negotiable insistence on proven good governance.

“Many companies in emerging markets have made great strides in entrenching good governance principles at the centre of their operations and management,” he emphasises, “and, as has been proven within South Africa, this type of genuine internal transformation is a highly effective antidote to the majority of external risks that may otherwise have jeopardised the investability of these organisations’ shares.

“Make no mistake, emerging market investment will still always require careful consideration of the economic drivers that characterise those markets,” he concludes, “but given the great strides made by numerous businesses in these markets, and the low cost to entry, investors who put in the legwork to find companies with solid governance principles and proven risk frameworks have an opportunity to unlock significant growth in the long term.

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