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Emerging markets – investing for the future

Emerging markets offer innovation, industrialisation and potential for economic growth. Is it time to tap into these opportunities?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly.

WARREN BUFFETT

The 20th century is often called "the American century". The US became politically and economically dominant, while its technological leadership and free market system helped to grow its wealth at an unprecedented pace.

According to Warren Buffett, the US has had its moment in the sun, now it’s China's turn and the investment potential is huge.

While China is expected to overtake the US as the world's largest economy it (along with many other emerging markets countries) is still some way from full economic development.

This economic immaturity may explain why many investors have overlooked Buffett's suggestion. In fact, the average global equity fund only invests around 5% in emerging markets, the lowest level in 15 years.

Instead, the US stock market has remained in favour and over the past decade, this has been the right call. The broader US stock market has grown 347.7%, compared with 126.9% for the Asian stock market and 89.7% for the higher-risk emerging markets. Please remember past performance isn't a guide to future returns. Source: Lipper IM to 31/10/2019.

This article is not personal advice, if you are unsure if an investment is right for you seek advice. All investments can fall as well as rise in value so you could make a loss.

Why emerging markets now?

At some point we expect these exciting and dynamic markets to shine and we feel long-term investors shouldn’t ignore them when building a well-diversified portfolio.

There’s strong evidence Asian and emerging markets have stored up growth potential although of course there are no guarantees.

Economic growth is far ahead of developed market counterparts, boosted by rapid industrialisation and young, hard-working populations. Domestic consumption is also set to be a key driver of growth over the coming years, helped by rising wealth.

But there's much more to it.

Asia, for example, contributes almost 50% to global GDP (gross domestic product, a measure of the goods and services a country produces), but it only makes up a small part of global benchmarks. This gap has the potential to close. If Asian companies continue to grow and make up a greater share of the global market, investors worldwide may gradually allocate more of their money to these markets.

Corporate responsibility and governance is also still catching up with the west. But increased regulation could change this, and help improve things like the treatment of labour and the impact businesses have on the environment. Companies are also getting better at disclosing the way they carry out business to the public, and making it clearer how much they take into account environmental, social and governance issues.

They're placing greater focus on the needs of smaller, individual shareholders as well. More and more businesses aren't simply looking to satisfy senior management, or those that own a large stake of the business. The fact they're paying out a larger share of their profits as dividends to shareholders is a sign of this.

Innovate to succeed

The ability to innovate is critical to a company's success. But there's an argument the east lacks true innovation. China, for example, has been accused of "borrowing" technology from the US, and appropriating intellectual property, rather than generating it.

China does have advantages over the west though. Some of its tech firms are collecting data at a phenomenal rate, and this gives them an extra string to their bow. From targeted advertising to predicting buying habits, collecting data presents almost endless opportunities for businesses to anticipate, adapt and influence customer needs.

China also aims to become the world leader in artificial intelligence by 2030, though many would argue it's already there. It has an advantage in areas like facial recognition and surveillance, which comes in useful in more ways than you'd think. Take farmers who insure their pigs. Insurance companies are able to use facial recognition technology to identify individual pigs, and this stops farmers making claims on diseased pigs that they don't actually own.

The online grocery market is another new frontier for ecommerce players. Big tech firms like Alibaba and JD.com are teaming up with bricks and mortar grocery stores to set up online deliveries. China's younger generation is now using mobile phone applications to buy groceries and get them delivered any time, any place. While staff pick and pack the goods, a courier waits to immediately take the delivery.

Long-term opportunity

We think most long-term growth portfolios, which can accept the extra risks and volatility, should consider some exposure to Asian and emerging markets. Many companies based there have ambitious plans for the future. They're ready to take on Western companies and leave behind the focus on low-cost manufacturing that has fuelled growth in the past.

It's not without risks though. The trade dispute between the US and China rumbles on and no doubt this has impacted both business and investor confidence. Economic and political reform also takes time to implement, and it won't always work out, so some bumps along the road should be expected.

How to invest?

Tracker funds offer investors a convenient and low-cost way to get broad exposure to a particular area of the market.

The iShares Emerging Markets Equity Index Fund is our top tracker choice for investing in the emerging markets. It aims to track the performance of the FTSE Emerging Index – a broad index of more than 1,000 large and medium-sized emerging markets companies, so it offers plenty of diversification. A range of countries, from China and India, to Taiwan and Brazil feature in the fund.

Find out more about this fund, including charges

iShares Emerging Markets Equity Index Key Investor Information

Alternatively, our favourite actively-managed funds can be found on the Wealth 50 list of our favourite funds.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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