An Introduction to Investment Trusts – Emerging markets comparison

The Investment trust landscape within emerging markets across the globe is a fascinating and diverse environment, offering long-term investors the opportunity to see significant returns. For example, reports from a range of Investment Trust managers indicate that over the past decade the average global emerging markets investment trust has returned 461pc (The Telegraph Online, 16/09/2011).

It is argued that this is because emerging markets are currently in a much better position than their Western counterparts due to their typically higher fiscal reserves and lower levels of debt, as well as strong macroeconomic trends.

Investing in emerging markets is therefore potentially advantageous through an investment trust. However it is important to remember that it is emerging market funds which are held only as part of a diverse investment portfolio that have seen the safest returns in recent times, primarily for investors who invest for the long-term.

Here we take an introductory look at the Investment Trust landscape within a selection of key emerging markets.

South America:

Countries within South America have arguably seen the greatest change of all emerging markets and Investment Trust activity has grown recently.

For example, the stock exchange integration between Colombia, Chile and Peru, which made it the second largest equity exchange in the region, has drastically altered the landscape within the region, especially as Mexico and other countries have also stated their desire to join.

The major cities throughout the region are also increasingly showing signs of becoming key international destinations for business and tourism due to large-scale improvement in local infrastructure, a trend with the potential to yield economic benefits for foreign investors. For example, Colombia’s real Gross Domestic Product (GDP) grew by about 6.0% year-on-year in 2011, while inflation ended 2011 at less than 4%, facilitating a generally optimistic economic outlook.

Certain areas within the region also display a forward-thinking mind-set towards energy production and consumption with a focus on efficiency which, combined with significant growth in production volumes, should create a healthy future investment environment.

South-east Asia

South East Asiahas experienced large scale economic change over the past decade. Providing the potential for real growth across many developing markets, this dynamic region has become an attractive modern investment arena.

Economies in Southeast Asia have been growing faster than in many developed countries such as North America and Japan as well as nations within Western Europe. They have also outperformed many of their emerging market counterparts which has been reflected in a steady increase in Investment Trust activity throughout the area.

This growth has been largely fuelled by the fact that Asian economies are rapidly increasing domestic consumption of a wide range of goods. Increased demand for core commodities from Asian industry has given a further boost and the growing demand is expected to continue the growth of industrial output, offering greater impetus for Investment Trust activity.

For example, the Indonesian stock market was one of the best performing markets in 2011 – the MSCI Indonesia Index was up 6% in US dollar terms in 2011 – and this is predicted to continue through 2012-2013.

This strong performance has been matched by Malaysia’s growth as a very attractive investment destination, particularly for consumer and commodity stocks. As a result of sound fiscal policy, stable macroeconomic fundamentals and continued demand of natural resources, the long-term outlook for the country appears both resilient and positive.

Thailand also appears to be healthy and the economic recovery in good condition. The key to this economic growth has been maintenance of the country’s substantial agricultural resources, exploitation of offshore gas reserves, as well as well-established and highly successful manufacturing and tourism industries.

As a whole, South East Asia, like South America, will also benefit from the continued increase in infrastructure quality within each nation and this development will feed into each country within the region. This should mean that investment into a well-managed and regionally experienced Trust will yield strong returns.

China

China is the world’s most populous country and remains one of the fastest-growing major economies.

Consumerism has experienced colossal growth in the modern era as per capita income has increased. This vast demand for consumer goods and services ensures that the earnings growth outlook for managed investment is extremely positive. China’s foreign reserves are also the largest in the world, making it less vulnerable to external financial downturns. Combined with the fact that inflationary pressures have continued to ease in China and the industrial sector is still recording strong growth, means that international investors remain attracted to China’s booming economy and continue to increase their activity.

Commodity stocks are the obvious attraction as the global demand for commodities is expected to continue its long-term growth and as such commodity prices will continue to rise due to continued demand and supply constraints associated with the area.

India

A weak rupee means that there is currently an inflation risk but this also makes India more competitive in the global landscape. Some companies have been negatively impacted while others, like exporters, benefit from higher foreign earnings.

If foreign investment in India increases then the strength of the rupee would rise and this appears to have been stimulated by a governmental decision to allow in excess of 50% ownership of foreign companies in the retail area.

However, general weakness in global equities and the fact that the Indian market is somewhat more expensive than other emerging markets, means that large investment flows into the country could be inhibited in the near to mid-term. This adds to the general volatility of the Indian marketplace and as investors around the globe are seeking to move their money into assets they perceive to be safe due to the global financial climate, predicting future Investment Trust activity in India is challenging.