Emerging Markets to Play Larger Investment Role - part 2

Continued from part 1... While Canada fared relatively well through the recession compared to some other developed economies, Cevey suggests the country’s economy could have done even better had it worked earlier and to a greater degree toward global diversification. Australia, he notes, invested heavily into Asian markets and it paid off. “There are certainly lessons to be learned,” he says. There is no denying the shift toward emerging markets, such as China, India and Brazil, is a long-term economic trend. “There’s a tectonic shift in economic activity from West to East that is absolutely undeniable,” says Cevey. “It may be a bumpy ride, but BRIC countries (Brazil, Russia, India, China) are creating generations of consumers – middle-income consumers – and that simply isn’t going to happen in more mature markets.” So what does it mean for the average investor? How can the average investor gain from this “tectonic shift”? Since capital markets are far more agile than the broader economy, there has been a proliferation, especially over the last few quarters, of investment products designed to target developing economies or emerging markets. It began with emerging market funds that offered investors a basket of investments in those markets and more traditional mutual funds. The problem, says John Youn, director of BMO Asset Management Inc., is that the fees on those mutual funds tended to be high – often between 2.5 to 3.5 per cent – to cover the increased costs associated with managing funds in those countries. Then investors began to see funds that targeted specific countries instead of a group of them, allowing investors to target India or China, for example. China’s gross domestic product (GDP) is projected to grow by about 10.5 per cent this year, compared to 9.7 per cent in India. In total, all emerging markets have projected GDP growth of 1.7 per cent. Country-based indexes began to flourish, offering global investors the ability to invest in a list of countries from Korea, Brazil, China and others as exchange-traded funds (ETFs) began to become popular because, like mutual funds, they give investors access to a basket of securities in any given country or region, but they are not actively managed and therefore carry much smaller fees. BMO’s emerging market ETF, for example, charges 53 basis points. In other words, if you invest $10,000, you only pay $53. “ETFs have become a good levelling tool for retail clients, investment advisers and even some institutional clients to get access to emerging markets,” says Youn. Country-specific funds are widely available to most investors, but Cevey notes they should be part – not all – of an investor’s strategy. Day-to-day volatility of emerging markets make them right for an investor with a higher risk tolerance. “We tend to advocate for retail investors to invest in a monthly investment plan to avoid putting your money all into one market,” says Cevey. “You’ve got to do this gradually.” Another option for retail investors is an American Depository Receipt (ADR). Korean-based Samsung, for example, will list their company on the U.S. stock exchange and open up access for Canadian investors. “To get entry into those marketplaces, people try to use ETFs or ADRs or an active mutual fund portfolio manager,” says Youn. It’s clear the opportunity for investment in emerging markets is likely to be an increasing part of any investor’s portfolio. It’s a long-term trend that isn’t going away barring any major, unforeseen economic event. As with most things, seeking advice is usually the best route to go if you’re not a sophisticated investor, but there appears to be little doubt that emerging markets will increasingly become an integral part of the foreign content of any sound portfolio. Click on the link to the right to download a pdf of our current issue.

Download Current Issue (55.8MB)