How to invest successfully in emerging markets

How to invest successfully in emerging markets

Investing in emerging markets is not for the faint-hearted. Share prices are more volatile than those in developed markets such as Britain – so do your homework before parting with any cash.

It's a long-term game …

This is not the time to make a quick buck. Anyone thinking of dipping in and out of emerging markets within the year is likely to get burnt, analysts say.

Ask yourself, will growth remain – and if it does, will it translate into share price rises while your money is invested?

Jason Hollands, a director of advisers Bestinvest, said: "Ultimately, it all depends on your time horizon. Over the next couple of years our hunch is that developed markets such as Europe and Japan will deliver higher returns for equity investors. However, if you are thinking over a 10-year period, then this could be the ideal time to invest."

And be careful diving in

If you do invest, do not be too swayed by today's ultra-low prices – they could fall further before rising again.

David Hambidge, a fund manager at Premier Asset Management, said: "You might strike lucky and find today is the bottom of the market, but no one has a crystal ball, so keep things in proportion."

Don't invest too much of your portfolio, whatever your views. In his balanced risk funds, Mr Hambidge only has around 3pc invested in emerging markets. Mr Hollands increases this to 10pc for his adventurous clients. Adrian Lowcock of rival Hargreaves Lansdown suggested 20pc as an absolute limit. Drip-feeding your investment will help. This allows you to buy more units of a fund when prices are low.

Not all opportunities are equal

The changing face of emerging markets has created a gulf between the prospects in different nations.

Tom Stevenson of Fidelity, the fund manager, said the days of just buying an emerging market tracker fund, which blindly follows the market, were gone.

"There are lots of opportunities, but you need to be more discriminating than before, with reference to country choice as well as sectors and individual companies," he said. This makes emerging markets a fertile field for stock-pickers who pore over company balance sheets to sort the wheat from the chaff, according to Julian Mayo of Charlemagne Capital.

Which funds?

In this period of uncertainty, the experts recommend established funds with conservative approaches.

Darius McDermott of fund broker Chelsea Financial Services recommended the £4.2bn First State Global Emerging Market Leaders fund. It is considered one of the premier specialist emerging funds, along with the £3.4bn Aberdeen Emerging Markets. Both funds have proved so popular that they have become bloated. Aberdeen has added a 2pc fee to discourage new customers. The First State fund is adding a similar 4pc initial charge on September 7, so investors need to move swiftly.

Tim Cockerill of wealth manager Rowan Dartington recommended the First State fund because it focuses on larger companies with solid balance sheets. Savers' money is also invested in better-regulated Western companies with large presences in emerging markets. For example, London-listed Unilever accounts for 5.5pc of the fund. The firm, which makes Marmite, Cornetto, Flora and Vaseline, sources 55pc of its turnover from emerging markets.

The First State fund has returned 200pc in five years.

An alternative option is the JP Morgan Emerging Markets investment trust, which is trading at an 11pc "discount", according to Mr Hollands. This means that you can currently invest for less than the value of the underlying assets.

Mick Gilligan of stockbroker Killik & Co recommended Utilico Emerging Markets investment trust. It trades at a 10pc discount.

Also watch Jan Dehn at Ashmore tell Jessica Winch which emerging markets to invest in and what are the risks:

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So God Made a Banker

Wed, 06 Feb 2013 18:08:54 +0000

By Brett Arends

Shutterstock.com

To be read in the voice of Paul Harvey.

And on the eighth day God looked down on his planned paradise and said, “I need someone who can flip this for a quick buck.”

So God made a banker.

God said, “I need someone who doesn’t grow anything or make anything but who will borrow money from the public at 0% interest and then lend it back to the public at 2% or 5% or 10% and pay himself a bonus for doing so.”

So God made a banker.

God said, “I need someone who will take money from the people who work and save, and use that money to create a dotcom bubble and a housing bubble and a stock bubble and an oil bubble and a commodities bubble and a bond bubble and another stock bubble, and then sell it to people in Poughkeepsie and Spokane and Bakersfield, and pay himself another bonus.”

So God made a banker.

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God said, “I need someone to build homes in the swamps and deserts using shoddy materials and other people’s money, and then use these homes as collateral for a Ponzi scheme he can sell to pensioners in California and Michigan and Sweden. I need someone who will then foreclose on those homes, kick out the occupants, and switch off the air conditioning and the plumbing, and watch the houses turn back into dirt. And then pay himself another bonus.”

God said, “I need someone to lend money to people with bad credit at 30% interest in order to get his stock price up, and then, just before the loans turn bad, cash out his stock and walk away. And who, when asked later, will, with a tearful eye, say the government made him do it.”

God said, “And I need somebody who will tell everyone else to stand on their own two feet, but who will then run to the government for a bailout as soon as he gets into trouble — and who will then use that bailout money to help elect a Congress that will look the other way. And then pay himself another bonus.”

So God made a banker.

Brett Arends is a MarketWatch columnist. Follow him on Twitter @BrettArends.

Is This Market Headed for a Correction?

Thu, 07 Feb 2013 19:51:18 +0000

By Chuck Jaffe, MarketWatch

The market’s recent strong run has brought out the buyers, but also the bears — with a growing number of high-profile investing pros suggesting the better-than-expected results and a return to record highs is leading lambs to slaughter.

On Monday, Pimco’s Mohamed El-Erian wrote in a note Monday that investors should be cautious in the face of the recent rally, arguing the market has been buoyed by central bank policy. ( See: El-Erian: Perspective on Dow 14,000 ) His better-known colleague Bill Gross was tweeting his skepticism about the Fed, suggesting that investors might want Italian bonds rather than U.S. stocks. See: PIMCO’s Gross says buy Italian bonds

Reuters

Meanwhile, Jim Shepherd of the Shepherd Investment Strategist newsletter – who tends to be bearish during the best of times – said on my show recently that the Federal Reserve has now created “the most gigantic bubble in history,” noting that a change is inevitable, and likely coming soon. “People have come to the conclusion now that the market will continue to rise for as long as the Fed is in the game, and I think that’s a very dangerous concept to hold,” Shepherd said.

With the Standard & Poor’s 500-stock index up 6.2% so far this year, and 15% over the past 12 months, the question for regular investors is whether to follow the herd, or run from it. After all, history shows that optimism typically rises in the crowd at the worst possible time.

Ultimately, the questions being raised are a reminder that, for most people, the decision should be less about being in or out of the market than about diversifying to be wary of both sides of the argument. To see why investors might want to check their diversification, let’s look at the numbers that suggest they are changing their allocations now, and then at warnings against doing just that.

Research firm Lipper Inc. reported $34.2 billion in net deposits into stock mutual funds and ETFs over the four weeks ended Jan. 30, the largest four-week total since January 1996. Several other industry researchers also reported high levels of cash flowing into stocks as the market climbed to five-year highs.

January marked the first time in 11 months that deposits into domestic equity funds exceeded withdrawals.

There is no shortage of experts expecting the money to keep rolling in to stock funds in the coming months. Backing up that likelihood are several sentiment surveys. The American Association of Individual Investors, for example, notes that bullish sentiment – the expectation that stock prices will rise over the next six months – is above its historical average, as it has been for nearly three months now.

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For the better part of the last two years, despite historic lows in interest rates, cash has been flooding into bond funds, with investors choosing safe havens over bargain stock prices. That’s ignoring the “buy low” part of the classic “buy low, sell high” mantra for making money in the market over time. In fact, it’s turning that equation on its ear, something investors do a lot.

A new study by Russel Kinnel, director of fund research at fund tracker Morningstar Inc., sheds new light on just how badly most investors do when it comes to moving their money around. Over the past decade, Kinnel found that the average mutual fund returned 7.05%, but that the average investor – based on asset-weighted returns that use the inflows and outflows to see how much of a fund’s performance the shareholder captures – netted 6.10%.

It’s worth considering now because the market has reached this interesting point, the one where many people have seen enough from the 2012 gains and the January five-year highs to be diving back into the market just as many observers now expect a correction.

Mark Hulbert of Hulbert Financial Digest noted this week that corporate insiders are cashing out, a negative sign because company executives typically don’t sell if they believe their employer’s winning streak will continue. ( See: Insiders now aggressively bearish ) In addition, Doug Kass of Seabreeze Partners Management told CNBC he’s getting “the Summer of 1987 feeling,” about U.S. equities. See: Jim Rogers joins bond bears; Doug Kass gets ’87 feeling

If talk of a correction is, indeed, correct, then a percentage of the money flowing into the market now will wind up buying at a peak, and the ensuing dive will send some of the newcomers back to the sidelines with a loss. That’s incorrect investment behavior no matter how you define it—buying high, selling lower and then not sticking around to see if the “corrected” market is about to resume its climb.

All too often, investors feel like they can’t engage their bullish and bearish sentiments simultaneously, that one feeling must win out over the other. But if ever there was a time when playing both sides against the middle would seem smart, it’s now — when investors don’t want to miss out on the rally while it keeps running but recognize that it can’t go on unabated forever.

For anyone following the crowd into the market now, experts suggest that they need to have a time frame that looks beyond the short-term pressures that might lead to a market adjustment; if they fear that a bubble is about to burst, they need to stay conservative or on the sidelines and make avoiding loss their priority.

Anyone scared to be in the market doesn’t belong there, but has to be willing to sit out a period where the market looks good until the tide changes.

For most, however, the right strategy is going to be a mix of bearishness and bullishness.

Historically savvy average investors have used diversification, putting some money to work to reduce each of those many worries. Some money into the market to take advantage of the opportunity, but some powder kept dry to guard against a market adjustment, and some in safe havens to provide peace of mind.

It won’t necessarily provide the “best” returns, but it’s the correct strategy for someone who sees the bulls running, the bears massing — and wants to peacefully co-exist with both sides.

Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers. Follow him on Twitter @MKTWJaffe.

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