Chetan Sehgal discusses what recent research reveals about investor mindsets regarding opportunities in emerging markets.
Emerging markets are home to some of the fastest-growing economies in the world.
Recent research by Templeton Emerging Markets Investment Trust looking at investor mindsets shows that UK investors are increasingly looking to emerging markets for investment opportunities, as uncertainty in the UK drives them to look for new avenues for growth.
Our research has shown that investors are twice as likely to expect higher returns from emerging markets in 2019 (33%) than from the UK market (17%).
This expectation for higher returns is being driven by a sense of opportunity with 36% of investors believing that emerging markets offer undiscovered opportunities, and 32% saying that emerging markets offer rapid growth.
UK investors are also four times as likely to say that their view on emerging market investing has become more positive over the past 12 months (20%) compared with becoming more negative (5%).
Despite a rocky time in 2018, emerging markets have grown by 10.68% over the past three years, 3.68% over the past five years and 8.94% over the past 10 years.
Furthermore, the overall improvement in emerging market policies and fundamentals provides a vital buffer when global headwinds emerge such as rising US interest rates and a strong US dollar.
Nevertheless, investors should be mindful of the disparities between individual markets. Much-publicised setbacks in certain economies have occasionally coloured investors’ perception of the asset class.
For us, disparities between countries and regions present an opportunity and point to the importance of taking an active approach, using local market analysis and insight to distinguish resilient economies and companies that are primed for sustainable growth.
When researching mindsets towards emerging markets, we also considered investors’ concerns.
When asked for their thoughts on the coming year, UK investors’ worries were broadly domestic in nature: Brexit (57%), the possibility of a general election (42%), and economic and political instability in developed markets (39%).
We also found that three months of negative economic growth in the UK is more likely to influence domestic investment decisions (35%) than a similar period of negative growth in China (25%), India (24%), or the US (27%).
Encouragingly, this shows that investors understand that emerging markets are a longer-term play.
Furthermore, while one in three (33%) investors are concerned about economic or political instability in developing markets, investors are less likely to react to macroeconomic threats in emerging markets.
Two-fifths (40%) of investors with assets in China and the US said that they made no portfolio changes during the escalation of the US/China trade dispute, and of those who did take action, only 15% said that they moved investments out of China.
Only 24% of investors surveyed were able to identify diversification as a benefit of holding emerging market investments. On average, 58% of the portfolio assets of those surveyed sit in UK markets, with only 10% holding emerging markets.
Despite years of progress and economic reform, outdated perceptions still exist and investors who hold on to old assumptions about emerging markets are likely to overlook the transformation of these economies and systematically under-allocate to the fastest-growing parts of the world.
Tips for getting started in emerging markets
Set a goal and think long term: whether it’s investing for a new home or retirement planning, it’s helpful to have a clear goal. When markets are volatile, it can be tempting to exit or switch to another asset class, but it’s important to ride out volatility as just a few days out of the market could impact long-term investment performance.
Do some research and consult a financial adviser: Emerging markets can offer the opportunity for considerable growth and add variety to a mixed portfolio. But not everyone is a stockpicker, so it’s important to do your own research as well as speak to a financial adviser.
Consider an active management strategy and using a pooled vehicle such as an investment trust: an active investment approach provides access to emerging markets experts who can find the companies best positioned to capitalise on growth and seek to both reduce risk and increase the value of your investment over time. Investment trusts offer an easy way to access a collection of investments, which have been picked by a team of experts.
Chetan Sehgal is lead portfolio manager at Templeton Emerging Markets Investment Trust.