Jill Kerby

EMERGING MARKETS:  INVESTORS NEED AN OPEN MIND

If investing was easy, we’d all be doing it, and we’d all be rich. 

Of course, during the height of the property boom, it was easy, and yes, we all got rich - on paper.  We bought houses with cheap credit that “earned” more each year than we sometimes did ourselves.  We actually thought, like ancient alchemists that we could turn bricks and mortar into gold by buying buy-to-let properties and watch their capital value rise. 

There’s a big difference between ‘getting’ rich and ‘staying’ rich however, and investing during any boom is no guarantee of the latter, especially when you’ve been used mainly borrowed the money to ‘get’ there.

Make no mistake, the global property boom, of which ours was ‘boomier’ than most, as a certain ex-Taoiseach once said, was more about cheap credit and reckless lending practices than it was about any notion that property was the ultimate investment asset that would never succumb to the laws of physics. 

Now that the dot.com and property markets have both proved the old axiom that what goes up must come down, are we simply blowing up new balloons by switching our attention to commodities and emerging economies?  They have soared in value in recent years, fallen in recent months are in a volatile up and down stage now.  Have they boomed out, or are they genuine investment opportunities with the potential for solid growth?

Commodities like steel, iron, oil, wheat and corn, etc and emerging markets like Brazil, Russia, India and China (the BRIC countries) the Gulf states and south east Asia are really two peas in the investment pod. 

These countries have things in common that established western economies no longer have:  billions of young, hard-working, thrifty people who are desperately keen to improve their standards of living and trillions of dollars of earned, mainly western, currencies sitting in their national treasuries and personal bank accounts. 

Sounds like a winning combination to me, and one that the Americans in particular had in abundance 100 year ago or so at the beginning of the Great Oil Age.  

Every economic (and mililtary) empire eventually gets tired.  They expand their borders of influence too far; they get lazy and arrogant and greedy; they inflate their money and borrow too much. They believe they can do all the thinking and let others do all the sweating.  The United State is no different than the British, the French, Spanish or Romans before them.   The East is rising in its place, along with all the other places that are unburdened (or less burdened) with a culture of debt and entitlement.

Which brings me around to the notion of cashing in, if we can, on this global economic shift without being caught up in the boom and bust cycle that unfortunately has also emerged along with these new super-economies. 

NO EXPOSURE

Just a couple of years ago I wrote an article about Irish pension funds investing in ‘Chindia’ and with the exception of a few Irish fund managers, none of them had any direct exposure to Chinese or Indian companies directly. Instead their funds were represented only by UK or US companies with a presence in the two countries or with established Hong Kong based finance and insurance firms with long links with the West. 

Today, not only does every fund manager have some sort of exposure via this model, but many have created their own funds, or linked up with others in which indiginous Chinese, Indian, Brazilian, Russian, Malaysian, Vietnamese, etc global companies are present, often with western interests of their own. 

These companies – Baoshan (iron and steel) of China, Gasprom (energy) of Russia, Tata (consultancy, autos) of India, Petrobras of Brazil – are some of the biggest in the world; they’ve helped to drive their surging stock markets. 

They too have got caught up in the share mania in which hundreds of millions of people, with lots of earned income in their pockets and lousy deposit rates on their savings – thought they’d get instantly rich if they bought their shares at the pre-credit crunch peak last year.  That stock markets look like pyramid schemes sometimes has nothing to do with the underlying value of the Baoshan, Tata or Petrobras’ of this new economic world. 

Despite the volatility, the bubble risk, even the medium to long-term dangers of investing in companies that are fossil fuel dependent dependent (are Indian  motor car companies really a good long term pension bet?) the best emerging market shares should have a place in your investment and pension portfolios. 

Finding the right shares or funds is the part that’s going to require effort on your part:

Compare the makeup and cost of Irish-based emerging market managed funds, the equivalent passively-managed share indices and ETFs (which you buy directly from a stockbroker).  RaboDirect provides transparent, detailed information about all its funds, including its new emerging markets ones.

Use the internet to dig up background information about the countries, companies and commodity markets.  Check out the excellent free archives that Forbes.com, Bloomberg.com and the MotleyFool.co.uk make available.  

Subcribe to weekly magazines like The Economist and MoneyWeek. 

Only risk money you can afford to lose: a 60 year old speculator in Chinese bank shares has the potential to lose a lot more than a 30 year old investor in Chinese engineering firms that build nuclear power stations.