Investors who backed emerging markets through the credit crisis could now be sitting on profits, while “safer” developed stock markets are still heavily down, according to analysis by RBC Wealth Management.
Emerging markets have bounced back strongly from the lows of the crisis, while returns for sterling-based investors have also benefited from a weakening of the pound since 2007.
Brazil’s Bovespa index is up 24 per cent in the two years to July 31 in pound terms, while Hong Kong’s H-Share index – covering mainland Chinese companies – has gained 11 per cent. India’s Sensex is up 3 per cent in pound terms, although Russia remains down 40 per cent.
By contrast, the UK’s FTSE 100 index has dropped 27.5 per cent since end-July 2007. Key benchmarks in the US, Europe and Japan have fallen more than the UK’s blue chip index, but are down less when returns are converted back into sterling.
Peter Lucas, investment strategist at RBC Wealth Management, said that contrary to what might have been expected in a severe downturn, stockmarket investors have generally done better taking “higher equity risk” and diversifying away from the UK market over the credit crisis. The performance differences supported the view that emerging countries could “decouple” from their Western counterparts, he said, and “raise the question of what constitutes risk”.
“Many of the ‘higher risk’ markets are also the economies of the future and, crucially, haven’t experienced a credit crunch.” He added that Russia’s poor stockmarket performance reflected its reliance on commodities and that it was a “heaven or hell” market without the broad growth potential of other leading emerging countries.
Lucas said the ideal time to have bought into emerging markets was last autumn, since when many investors have enjoyed returns of 50 per cent-plus. “Investors could have bought at the same or lower price-earnings multiples than developed markets – it was a particularly attractive entry point.”
However, he said that with many equity investors underweight in emerging markets – in part because of their low weightings in global indices – most would still be heavily down across their portfolios over the last two years.
Investors could also have done better in developed-market bonds, where returns of about 50 per cent have been possible during the credit crisis, due to falling interest rates and inflation, combined with weaker sterling.
Chinese equities have seen a strong sell–off this month, and a substantial drop in emerging markets this autumn could provide a new buying opportunity, suggested Lucas, particularly given the pound’s recovery this year from previous lows.
Adrian Lowcock, senior investment adviser at Bestinvest, added that while emerging markets now looked “fully valued”, the more bullish investors were on recovery prospects, the more they should favour these holdings. He also suggested dripfeeding money in to counter their high volatility.
Separate index figures for the past 12 years also underline the strong long-term performance of emerging markets against the developed world. Brazil’s Bovespa has gained 453 per cent while India’s Sensex is up 289 per cent since 1997 against the 4 per cent rise in the FTSE 100 index since Labour came to power, according to investment firm BGC Partners.
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