Traditionally when we invest offshore we tend to look to the developed world, coming from an emerging market ourselves. Global investment managers are now arguing that emerging markets will be the preferred investment destination of the future and that a significant portion of your offshore investment should be taking advantage of these high growth economies.
Stanlib economist Kevin Lings says that currently emerging economies (Asia, India, China, Africa, South America) make up over 30% of the world’s economy.
Figures reported by the International Monetary Fund (IMF) estimate that emerging economies are on average expected to grow by 6% a year compared to 2% for developed economies. This means that emerging economies will continue to grow faster than developed economies and increase in economic importance. Yet developing countries’ stock markets only account for 13% of the world’s market capitalisation and herein lies the opportunity.
Developed markets cannot outperform their economy
Currently the valuation of the developed world’s stock markets makes up 87% of the total value of the world’s markets, but its economies make up less than 70%.”A stock market cannot outperform the economy that supports it,” says Lings which means eventually investors will start to look beyond low growth economies like Europe and the US and will move more of their assets into emerging markets.
Lings argues therefore that a long-term offshore portfolio should have a 30% weighting to emerging markets. But be warned, this growth will not be in a straight line. While investors believe in the long-term growth story of emerging markets, they still consider then risky in the short-term so as the global uncertainty continues we will see high levels of volatility in these markets.
Emerging markets have low debt levels
It is ironic that emerging countries are still considered a higher risk when in fact economically they are in a far better position than the developed economies. There has been a complete reversal of fortunes between the developed and the developing particularly around government debt. If only the developed world had practised what it preached.
In the 1980’s, “developing country” was a synonym for indebtedness and these countries were classic studies of how not to run an economy. Today, after the financial crisis shook the world, the shoe is on the other foot. Developed economies have debt levels of 91% of their GDP and this is expected to rise to 110% by 2015. By comparison developing countries have an average country debt level of 38% and this is expected to fall to 34% by 2015 and this includes many African countries. Africa has changed radically from the Bob Geldof image and many African countries are now attracting the attention of global investors.
The Africa story
Local fund managers are talking up Africa as an important investment destination, but this is being overlooked by South African investors. Apart from the Afro-pessimism that tends to inflict South Africans, a real issue is the illiquidity of the African stock exchanges. Most African funds are aimed only at institutional investors who understand that the funds need to be invested for a long period of time. For retail investors a good African play would be to invest in South African companies where an increasing percentage of profits are coming from Africa such as Shoprite or MTN.
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