There are loads of good reasons to worry about the outlook for emerging markets.
There's the ugly geopolitical outlook. Things may get worse in Ukraine and the Middle East. When investors start worrying about these sorts of risks, emerging markets are often one of the first assets they dump, whether it makes sense or not.
There are also plenty of people who worry about China's financial system. They fear that a credit bubble in China could deflate the whole Chinese economy when the bubble bursts.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Then there's the US. As the US central bank gradually raises interest rates and stops printing money, investors will withdraw cash from emerging markets and bring it home' to the US. Or so the theory goes.
There's at least an element of truth in all these concerns.
So why do I think that now is a good time to buy?
Markets are fretting too much about higher US interest rates
But history suggests that these fears are overdone. If you look at what happened on the last two occasions that the US pushed up rates significantly, emerging markets weren't hugely affected, according to Capital Economics. The last time a US tightening made a big impact was when interest rates were raised in 1994.
However back then, emerging economies were far more dependent on the fortunes of developed markets than they are now. Today, the likes of China are no longer just' supplying cheap labour or commodities to the West. Instead, these countries have growing middle classes with money to spend on their own countries' goods and services.
What's more, the tightening in 1994 was unexpected and happened quite quickly. That's very different from the situation now. The monetary tightening that we will see over the next couple of years has been extremely well flagged. One thing is clear Fed chief Janet Yellen doesn't want to spook the markets.
As I result, I think any upcoming tightening is already priced in' to emerging market share prices. In fact, this anticipated tightening is probably the main reason that emerging-market share prices look reasonably cheap right now.
That said, you should be picky about which emerging markets you choose to invest in. For example, Russia looks very cheap if you focus on the traditional investment ratios. For example the latest figures on Mebane Faber's IdeaFarm website put Russia on a cyclically adjusted price/earnings (Cape) ratio of just 6.4. (We explain how the Cape ratio workshere, and why we like it.)
But given that Russia now faces significant economic sanctions, the risk levels are too high for me (although you may not agree Merryn is more tempted than I am, as she notes in this blog post). I also worry that countries in emerging Europe', such as Poland and the Czech Republic, could also be affected if the Ukraine mess worsens.
For me, China and Asia in general look like the most attractive options. According to Faber, China currently has a Cape ratio of 11.8 much lower than the UK, on 14, and the US, on an eye-watering 26. So China is a far cheaper market, and also has much more growth potential in the long term.
China certainly has its challenges. Its next stage of growth won't be easy, and it's possible we'll see a blow-up in the financial sector. However, on the more positive side, the government's gradual economic reforms should help to offset some of these risks (you can read more on these changes, announced at the end of last year, here).
Last month's strong export numbers from China were also encouraging. As Jan Dehn, an emerging markets fund manager at Ashmore, points out, strong exports should make it easier for China to cope with the ongoing attempts to shift its economy towards a focus on "less sophisticated domestic sectors".
I also think that South Korea looks particularly interesting just now. The market has always been cheap compared to most similar nations, because of concerns about corporate governance. But now the government is pressing businesses to pay out larger dividends and generally take better care of shareholders, which can only be good news for investors.
How to invest in China and Asia
iShares FTSE/Xinhua China 25 ETF (
).
JP Morgan Chinese investment trust (
).
If you'd prefer to put your money into a fund that invests across Asia, take a look at the Baillie Gifford Pacific fund. This invests in most countries in Asia, apart from Japan, and it's delivered an 80% return over the last five years a better performance than most of its peers. It's run by an up-and-coming fund manager called Roderick Snell.
As I've said, I've already invested some of my savings into China. I'll be looking to increase that investment in the near future.
Our recommended articles for today
Profit from the dawn of the connected car
Too many investment experts' ignore this
Timing the market is often dismissed as outright folly, says David Thornton. But it is something that investors should bear in mind.
On this day in history
22 August 1932: BBC starts early TV broadcasts
-
Bitcoin price one of the most-asked questions on Alexa - here's how to buy the cryptocurrencyAccording to figures from Amazon, which cover September 2023 to November 2024, pop star Taylor Swift and Bitcoin were named among the most popular Alexa queries of 2024
-
Investing for children this Christmas – five ideasIt might not come with a shiny ribbon, but an investment fund could be the gift that keeps on giving. We share five ideas if you are investing for children this Christmas.
