How to invest in emerging markets
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After the numerous reports of plunging growth, falling exports and a sharp jump in interest rates, positive sentiment is returning to the region.
Emerging market equities have been through a tough year, with the contraction in Chinese manufacturing and the incipient recovery in the USA as well as Europe attracting investor attention. After the numerous reports of plunging growth, falling exports and a sharp jump in interest rates, positive sentiment is returning to the region.
Portfolio manager Devan Kaloo from Aberdeen Asset Management is the portfolio manager of Danske Invest Global Emerging Markets Class A and Global Emerging Markets Small Cap Class A. He offers four tips to take into account if you consider investing in emerging markets.
Do not view emerging markets as one region
Emerging markets are very different, and the individual countries often have widely different characteristics. While Brazil and Russia have substantial commodity exports, India is a large textile exporter. This should be taken into account when investing. Moreover, the individual countries in the region do not always develop in parallel.
Because of the differences between the countries, it is important to weight the countries in the portfolio on the basis of outlook. Thus, Danske Invest Global Emerging Markets Small Cap holds investments in Brazil, South Africa, India and Malaysia.
Buy companies – not markets
Just as the countries are mutually different, there are also huge differences between companies in emerging markets. Investors should therefore focus on well-run companies with strong business plans and solid financial positions and which are committed to transparency. Minority shareholders have previously had a hard time in emerging markets, but corporate governance has improved.
Also, it is important to remember that macroeconomic progress far from always has a positive impact on the individual company, and therefore stock selection should be based on the company's situation.
Look out for corporate governance
In recent years, emerging market companies have succeeded in lifting their management quality substantially. This is an obvious factor for investors to consider when seeking a company with potential. Companies simply have to have high-quality corporate governance to deliver results. In e.g. Brazil, corporate management quality has improved markedly over the past decade, and studies have shown that better run companies also perform much better. This is also one of the differences between China and Brazil, which has better management quality.
Emerging markets are for investors with a risk appetite
Emerging markets have achieved very high growth rates, but also taken some serious hits in recent years, which investors should be prepared to accept.
Generally, however, the region is expected to hold a bright growth outlook in the longer term, but there will be cyclical bumps along the way. Growth will by all accounts not return to high levels, and overall growth will mask wide differences between the individual countries. This will offer attractive investment opportunities for investors who know how to manoeuvre between the individual countries.
