An entree to emerging markets

Reward for risk

Investors are being rewarded for the risk they are taking by investing in emerging markets, not for higher economic growth, Sauter says.

And, as the risks of investing in emerging markets are high, the long-term returns should be high.

Some of these risks are well known. Many companies in emerging markets are under family control. Their interests may not be aligned with those of minority shareholders and corporate governance standards can be low.

However, the risks of investing in Asia, in particular, are fewer than they used to be as the countries continue to develop, says Kerry Series, the chief investment officer of Eight Investment Partners, which specialises in the Asia-Pacific region.

''Emerging markets are still volatile but investors just have to put up with volatility if they invest in these markets,'' Series says, adding that emerging markets are still peripheral for global investors.

When there is investor nervousness, they withdraw their money from emerging markets first.

However, the volatility creates opportunities for astute fund managers, Series says.

While the link between economic growth and sharemarket performance cannot be established, robust economic growth is certainly not bad for share prices. Series says the fact the big developed countries will be growing slowly will likely mean more investor funds will be going into Asian shares, moving Asian share valuations from less than their true worth to a premium in the next several years.

Still, concerns persist, particularly regarding China, the biggest emerging market. Higher interest rates to subdue inflation have led to a credit crunch, squeezing property developers and slowing exports as a result of slower global growth, the chief economist at AMP Capital Investors, Shane Oliver, says.

Nevertheless, export growth in developing Asia, overall, has proved remarkably resilient, the portfolio manager of the Fidelity Asia Fund, David Urquhart, says.

Although Asia is certainly not immune to a slowdown in the West, the region's economy is significantly less reliant on exports to the West than many investors realise, he says. More than half of Asian exports are now traded within Asia or other emerging markets, which has meant export growth has remained resilient, even as growth in the West has slowed this year, Urquhart says.

Read more: http://www.smh.com.au/money/investing/an-entree-to-emerging-markets-20111111-1nbgy.html#ixzz1fzRPsnfO