Opinion
How to make the most from emerging markets
By Lieven Debruyne (China Daily)
Updated: 2010-03-25 11:22
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Spring is always an exciting time for financial markets. Year-end (or near year-end) company earnings are keeping investors on their toes, as everyone studies the numbers carefully trying to find the next big investment.
Whether companies are in the black or in the red, there is one common theme among them this year.
At the end of February, United States-based food maker H. J. Heinz Company said sales in emerging markets, particularly Asia, helped boost third-quarter revenue by 13 percent.
French specialty chemicals company Rhodia SA said exposure to emerging markets will continue to help improve profitability in 2010, after the company generated 45 percent of its sales from emerging markets last year.
Global hotel group Hyatt Hotels Corp recorded a loss in fourth quarter earnings, but stressed it is ready to capture in opportunities in emerging markets, where commercial activities are well supported by economic stimulus measures.
Corporations are focusing much of their attention on emerging markets in 2010, shifting key business and economic activities to these regions. This creates opportunities for investors to jump on the bandwagon, but some might be scratching their heads on how best to gain exposure to emerging markets.
A number of general points can be made based on the positives and negatives of the three main strategies: a global emerging markets approach, a regional approach and an individual country approach.
Global approach
There are a number of benefits for investors who adopt a global emerging markets approach.
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Managers who take active country and stock decisions, rather than the bottom-up approach, are better placed to add alpha from country exposure. Getting country allocation correct is a key source of return.
Second, a global approach ensures that the entire universe of emerging economies is considered.
The MSCI Emerging Markets index contains 22 countries and regions, 12 of which have an index weight of less than 2 percent, and seven have an index weight of less than 1 percent. Individually, these markets might not seem too important, but in aggregate they are a key part of the overall universe.
Moreover, a global manager will also be more likely to consider investing in frontier markets which are expected to become more important in the years ahead.
Third, such an approach brings significant diversification benefits. The trade off between risk and reward is generally much more attractive if a GEM approach is adopted. For example, taking money out of the EMEA or emerging Asian region and investing in GEMs can reduce risk and increase return.
