Take a long-term view on emerging markets
Investment is sometimes a case of getting one or two big decisions right.
Let's assume that on March 3 2009, as global markets hit bottom, you recognised amid all the fear and loathing that this was the time to buy. With markets all around the world on the skids, which would you have chosen?
The decision you took, as the chart shows, was an important one because the returns in the 21-month recovery since then have been anything but even. £1,000 invested in the Japanese stock market has turned into £1,250 over that period. Better than a poke in the eye but not great from the starting point of one of the worst-ever bear markets.
If you'd succumbed to home bias, you would have done better. The FTSE 100 index has risen by 69pc since March 2009. But both of these developed markets have been left for dead by India's Sensex, which has turned £1,000 into £2,380 in less than two years. It is little wonder that flows into emerging market funds took off last year or that the consensus for 2011 returns is so unanimous. Go East young man has been the clear message.
Until the past few weeks that is, when the mood music changed. They remain a minority, but the voices calling the top for emerging markets are gaining in confidence. The consensus is "complacent", some say; others suggest that investors are blowing a bubble that will end badly.
There is plenty of evidence that investors have fallen in love with the emerging markets story, with around half saying they expect to increase their exposure to stocks in the developing world and a quarter saying they want more emerging market bonds. The numbers of investors saying they want to reduce their exposure is vanishingly small.
The case for adopting a more cautious stance is reasonable. Valuations, which have traditionally put emerging markets at a discount to the developed world to reflect the greater risks involved, are now broadly comparable. Inflation, with the notable exception of the UK, is not an issue in the developed world but increasingly it is a headache in emerging markets. Meanwhile, concerns about corruption and poor infrastructure have not gone away – investors are just choosing to ignore the former and to see the latter as an opportunity.
Crucially, investors are being warned that GDP growth and investment performance have not historically gone hand in hand. The price you pay for growth is quite as important as the growth itself and if the good news is already priced in then a popular market can run very fast just to stand still.
I understand the scepticism in the short term and, as I have written in the past few weeks, I think developed markets such as the US, selected parts of Europe (such as Germany) and even Japan will have a relatively good year in 2011. But on a longer-term view, I'm not prepared to give up on the emerging market story.
Take India. Since economic liberalisation began under current prime minister Manmohan Singh in 1991, GDP has grown by an average of 6.3pc a year, almost twice the average for the global economy as a whole. Between now and 2015, according to the International Monetary Fund, growth will average 8.4pc, again twice as fast as the rest of the world.
India has enormous problems – illiteracy, widespread poverty, high infant mortality – but so many advantages too. Almost a third of the population is aged under 15 and just 5pc over 65. The government has pledged to all but double spending on physical infrastructure by the end of the current five-year plan to 2012.
More than $500bn will be invested, with maybe twice as much in the next five-year period. The Indian population is poised on the brink of an explosion of domestic consumption as its income per capita enters the sweet spot where people, for the first time in their lives, move beyond subsistence.
Yes, valuations matter, especially in the short term. But over the longer term, the steady compounding of a superior growth story is more important. When I bought my first property in London 20 years ago, close to the top of the market, all the same arguments would have applied. But the 10pc or so I may have paid over the odds at the time is totally inconsequential today. In 20 years' time, I don't expect to be quibbling about the PE ratio of the Indian market in 2011.
• Tom Stevenson is an investment director at Fidelity Investment Managers. The views expressed are his own.