China slowdown doesn't alter EM appeal
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Nicki Bourlioufas is a Morningstar contributor.
With economic growth over the long run expected to be greater in emerging markets (EMs) than the developed world, experts suggest investors should have an exposure to EMs such as China, notwithstanding a cyclical slowdown in that country.
Ernst & Young forecast earlier this year that the GDP of EMs could overtake that of the developed economies as early as 2014, with about 70 per cent of total world growth in the next few years coming from the EMs.
Over half of that growth will come from China and India.
Mark Laidlaw, a research analyst with Morningstar Australasia, said EM investments offered investors the potential to diversify their portfolios and reap handsome capital gains over the longer term, notwithstanding greater short-term risks.
"Many see EMs as a catalyst for future growth and EM investments allow investors to diversify their portfolios. You've also seen, purely from a macroeconomic perspective, the EMs have come through the last financial crisis a lot better than the developed world," he says.
Experts say an economic slowdown in China, which has rattled global markets this week, doesn't alter the outlook of expected outperformance by EM nations of the developed world over the longer term.
"Emerging markets are likely to provide very strong economic growth and one of the key reasons is the huge number of EM consumers coming into the global marketplace given their emerging middle classes," says Craig Mowll, CEO of Certitude Global Investments.
"You've got 3.5 billion consumers in EMs compared to 1 billion across the developed world. When you consider that, you can see the strength that EMs can offer," Mowll says.
"The fact that China's growth is dropping to 7 per cent growth shouldn't really be a big problem. If you do get that growth, considering where the rest of the world is at, that's still pretty good."
Grant Forster, CEO of Principal Global Investors Australia, agreed, saying that over the past 10 years, EM markets had outperformed developed markets.
"I think it will hold equally true for the next 10 years."
Over the 10 years to June 2012, EM sharemarkets had returned 7.4 per cent a year on an unhedged basis (MSCI Emerging Markets), versus 1.2 per cent a year for global developed markets (MSCI World Ex Australia).
The results have been reversed in recent times. EM sharemarkets have fallen 12 per cent over the past year compared to a 0.5 per cent fall for developed markets, which have benefited from flight-to-quality asset buying given European debt woes and global growth concerns.