What exactly are emerging markets, why invest in them and are there any risks involved? We answer these questions and break down the major markets here.
What is an emerging market?
Emerging markets is the term used to describe countries or regions where the economy is seeing rapid economic growth and industrialisation, often at a higher rate than developed markets such as Europe, the US and the UK. However, as emerging markets they will often be more unstable politically than developed economies and therefore represent a potentially higher risk to investors.
So how can you identify an emerging market? The key characteristics will typically include:
- Strong economic growth
- Rising income per capita
- An expanding middle class
- High productivity levels
- A physical financial infrastructure (banks, stock exchange etc)
An emerging market economy will be one that is in transition to become a developed market, and is looking to take on the characteristics of developed markets such as a stable financial infrastructure.
The major emerging markets
Currently, major emerging markets include Brazil, Russia, India, and China, the ‘BRICs’ countries, while other countries seen as emerging markets, and in the MSCI Emerging Markets Index include Mexico, South Africa, Argentina, Poland and the Philippines.
Looking at the BRICs economies, Brazil is the tenth largest economy in the world yet has gone through a turbulent time over the past two decades. Up until 2012 it was one of the fastest growing economies in the world but in 2014 it suffered an economic crisis and fell into recession. This was caused by a combination of political instability and a global fall in commodity prices. Brazil is rich in natural resources and the economy is heavily dependent on commodity prices, so the slump hit exports hard and also negatively impacted inward investment into the economy. While Brazil’s economy grew by 3.2% in 2022, this is expected to decline to around 1.2% in 2023 as a result of the threat of global recession and falling commodity prices.
Russia has been moving steadily towards a developed market over the past two decades, however, the economy declined sharply following its invasion of Ukraine in 2022. Since then, the International Monetary Fund (IMF) has projected it will grow by 0.3% this year. Russia has substantial gold reserves. It has three main sectors contributing to GDP, these are agriculture, industry and services. It is heavily dependent on producing fuel and energy for its economic growth.
India has been an emerging market success story over the past decade. The election of prime minister Narendra Modi in 2014 saw the economy refocus to a more pro-business and market agenda. This included the introduction of economic reforms aimed at making India more attractive to foreign investors. India is the fastest growing major economy in the world. It also has one of the youngest populations in the world, which benefits the labour force. It has strong domestic demand for goods and services and is therefore less dependent on international trade flows. The IMF has predicted India will be one of the fastest expanding economies with growth expected to reach 6.1% in 2023 and 6.8% in 2024.
China is the largest emerging market, alongside India. From beginning to open up and the implementation of market reforms in the late 1970s, it grew by around 9% a year on average. This was fuelled in large part by low-cost manufacturing, investment and exports. However, growth has moderated in recent years due to falling labour force growth and declines in productivity levels. Until the government reopened the economy in January of this year, it had also suffered as a result of close to three years of strict lockdowns and quarantine. However, the OECD is predicting that China will see growth rebound to 4.6% this year as it focuses on getting its economy back on track.
Investing in emerging markets
There are clear reasons to invest in emerging markets funds, not least the often higher returns associated with rapidly growing economies, meaning investors can potentially benefit from enhanced returns over the longer term. According to the International Monetary Fund (IMF), emerging market economies now contribute nearly 80% of global economic growth.
And, as emerging markets become more integrated into the global community, this can encourage them to adopt international standards, potentially helping to further improve their investment performance.
Furthermore, emerging markets will often have a competitive advantage over more developed economies as they are able to produce and export goods at a lower cost to wealthier nations.
Investing in emerging markets funds also offers investors valuable exposure to international diversification. If markets or economies fall in one part of the world, this exposure may be mitigated by investment held in different markets or emerging markets funds.
What are the risks of investing in emerging markets?
While investors may benefit from potentially higher returns in emerging market funds, the risks are also greater.
Emerging markets are likely to be more politically volatile than developed economies and any political upheaval can have a negative impact on the economy and potentially for investors too.
The currencies of emerging markets tend to be more volatile compared to the dollar. Any sharp currency fluctuations are likely to affect any gains investors may have made and not necessarily for the better.
There is also general economic risk which arises from investing in an emerging market, where there may be a lack of regulation around internal markets or questionable monetary policy; the risk of high inflation or a deflationary environment; or shortages of labour or materials.
Top emerging market funds
Liontrust has a range of funds investing in emerging markets, which aim to provide investors with exposure to fast growing economies while balancing risk through their investment process.
These funds include the Emerging Markets Fund, the India Fund, the China Fund and the Latin America Fund.
The range of Liontrust emerging markets funds share the same long-term approach to investing, looking to generate capital growth for investors over the longer term, typically five years or more.
All of the funds choose to invest in companies that they have identified as ‘emerging leaders’ – these are businesses that the fund managers believe are well positioned to thrive in times of rapid change across their respective economies. At a time when disruptive business models and innovative products are driving huge change across the global economy, this resilience and the capability to prosper as a result of dynamic change is hugely beneficial to future growth prospects.
The India Fund invests at least 80% in Indian or India-based businesses. The China Fund is 80% invested in Chinese companies (which also includes those domiciled, registered or largely doing business in Hong Kong or Taiwan). The Latin America Fund invests at least 80% in Latin American companies.
Meanwhile the Emerging Markets Fund invests at least 80% in emerging markets companies from around the world, with the proviso that the countries in which the companies sit must be in the MSCI Emerging Markets Index.
For more information on our range of emerging markets funds please visit here.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
Investment in funds managed by the Global Fundamental Team may involve investment in smaller companies. These stocks may be less liquid and the price swings greater than those in, for example, larger companies. Some of the funds may hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio. Investment in the funds may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. Some of the funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.
DISCLAIMER
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID), which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. Always research your own investments. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust.
