For anybody with even the most passing interest in economics, they will have noticed that growth in the last ten years or so has been sluggish at best for most established markets. On the other hand, and this will require spending a little more time researching global economics, emergent markets such as China and India have experienced unprecedented growth over the past 20 years. With projected development set to outpace traditional markets in Europe and the US, many investors are being drawn in to try and make a quick return.
Expansive GDP Growth
Ashay Mervyn is the Head of Emergent Markets at JNF Capital Ltd, and therefore is no stranger to the burgeoning markets in developing countries like China and Brazil. China’s GDP has grown by a factor of 17 in the 20 years between 1992 and 2012, and with the huge migration of outsourced communications and technology services to India, the world’s second most populous country saw an increase of 500% to its GDP. The bottom line with rapid increases such as these means that the average person has more disposable income, giving far greater opportunities to investors than ever before.
To put that into perspective, in the US GDP fell by 0.9% in 2014 after a long period of recession that affected most of the developed markets and one of the reasons why the US economy has been able to bounce back so far, is partly to do with the strength of investment in non-US markets. In the early ‘90s it was nearly impossible to convince investors to put capital into emergent markets, but over the last ten years the roles have reversed and now India, China, Brazil and Sub-Saharan Africa are the markets traders are really interested in.
Experienced investors will already be aware of the benefits of creating a diverse portfolio that will reduce their overall risk. The same is true when talking about investment on a macroeconomic level. While Western markets are bouncing back, the ease at which they slipped into recession following the collapse of the Lehman Brothers should be enough to dissuade investors from investing solely in these markets again. During the same time period, emerging markets fell too but their return to higher growth levels than before gives greater credence to the idea of diversification.
Higher Risk, Lower Price
Another reason why investors are attracted to emergent markets is that the risks for some areas have been exposed and this has further driven down the price for investment, in spite of the rate at which the markets returned to profitable levels. What this means for investors is that they can get in to emergent markets at a lower price, diversify their portfolio to minimise risk and potentially yield a slightly reward than in the domestic market. All investments carry some levels of risk, but with the entry price remaining low for most developing countries then the ratio of price to risk is far better.
It is important to remember that together, the emergent markets represent a third of the world’s total GDP and they have achieved this level of growth quickly. Careful consideration must be taken before investing in more volatile markets, but the rewards can pay off in a big way if the market continues to grow like in recent years.