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    Emerging versus Developing

    Emerging Markets (EM) are currently all the rage in the investment world. Billions of investment dollars are pouring into this asset class as investors seek to capture their share of the investment return that this asset class has produced over the past 10 years. Unfortunately, however, investing doesn’t always work like that.

    You can’t just invest into an asset that has done spectacularly over an extended period, and expect it to carry on doing the same. There needs to be fundamental reasons for making the investment. The chart below shows the performance of the ALSI and EM versus the Developed Markets (DM) – all based in US dollars – over the past 10 years. These markets have outperformed the MSCI World by some 400% and 200% respectively over this period!

    To the casual investor they’ll probably say that this was down to superior economic growth in this region. While he’d be right that these economies produced strong economic growth over the past decade, the performance of these markets can’t purely be ascribed to economic growth. The chart below shows the different growth rates of EM and DM countries since the end of 2000.

    Investing is always about what price you pay for the specific asset that you buy. Buying a portfolio of good quality assets at extremely expensive prices is not as wise as buying a portfolio of poor quality assets at extremely cheap prices. Ideally one would buy good quality assets at extremely cheap prices, but this opportunity doesn’t come around that often.

    Taking a look at the 5 years immediately prior to the above charts we can see in the charts below that while the EM economies grew faster than their DM counterparts, the performance relative to the DM was extremely poor. The EM composite underperformed the DM composite buy some 87%, the ALSI fared slightly better but still underperformed by 80%!

    Good entry points into EM equities included the beginning of the decade, and also at the end of 2008 as EM equities were sold off more aggressively than DM equities. Despite the fact that EM economies are expected to grow much faster than DM economies over the next 5 years (and beyond) – see chart below – we feel that from a valuation perspective developed markets are currently more attractive.

    High quality companies (with exposure to the rapidly growing EM economies) are currently trading at attractive levels in DM countries.

    If you have any comments on this report, or want to have a look at online investment articles that we find interesting become a fan on our Facebook page by clicking here and clicking the ‘Like’ button.

    Take care,

    Mike Browne
    021 9144 966

    Permalink2010-10-21, 17:37:23, by Mike Email , Leave a comment
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