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A recent study by Baring Asset Management found that an astonishing number of British adults — more than four million — were seriously considering an investment in emerging markets in the next 12 months.
That might not be true, of course — the figure certainly seems very high, particularly when set in the context of the proportion of people in the UK who actually own shares. But even if the number is exaggerated, there should be little dispute about the trend. There is no doubt that emerging markets have caught the imagination of British investors, and consequently the money is pouring in.
Nor is there any great confusion over why this should be happening. Almost everyone on the planet must know by now that China and much of the rest of Asia and South America are booming while the mature economies of Europe and the US are still mired in the aftermath of recession.
They are growing at 10% while we struggle to get to 2%. Most investors will also have seen projections of how those same economies account for only about 10% of global stock market capitalisations while those economies already account for perhaps 25% of global GDP and in a few decades are likely to make up 50%.
Emerging markets are where the growth is, so it seems logical to buy into that growth by investing in their stock markets. Not without reason was one of the biggest and most successful new issues this year the £400 million-plus raised in the stock market to back a new China fund run by Fidelity's Anthony Bolton.
Consultancy Capital Economics yesterday contributed its own thoughts in a note headed “Outperformance of emerging equities looks here to stay”. It cited three reasons for this. First, while the positive growth story is well known, there is growing recognition that the economies are becoming more resilient to shocks as governments and central bankers improve their policy making.
Second, inflation — which had appeared to be a threat earlier this year — now looks to be receding, partly because of measures put in place to slow things down, partly because governments are beginning to allow some upward movement in their currencies. Credit controls are also being used to stop the development of property and other asset bubbles, and this means that interest rates can stay lower for longer, minimising damage to the rest of the economy. Third, valuations are generally reasonable, albeit the price-earnings ratios are close to those found in developed markets.
It is a persuasive case but is it enough? Everyone agrees that those economies are growing at a huge rate but one of the most counter-intuitive findings of recent academic research says that there is no correlation between economic growth and stock market performance. Many have looked for it, including the trio of London Business School professors Dimson, Staunton and Marsh who have data on the world's stock markets going back 100 years. But there really is no correlation. If anything the results are negative.
It is hard to tell why this should be but there is no shortage of ideas. One is that investors can only buy established companies while the growth frequently comes from new firms which don't come to market. Much growth is also in infrastructure and in the public sector where, again, it is impossible to buy shares. Third, the vast majority of shareholder return comes through dividends and companies in emerging economies tend not to be generous payers.
Fourth is volatility: emerging markets are prone to crises and those crises can blow up very fast. In 18 out of the 20 years up to 2005, an emerging market was top of the charts. Trouble was it was never the same market for two years in a row. They went up like a rocket then down like a stick.
Yet all that growth is hard to ignore, which is why some say the best plan is to buy western companies that are well-positioned to trade with emerging markets. Interestingly enough, one of these reported yesterday. Hays is a recruitment consultancy. Five years ago, 77% of its profit came from the UK, this year that figure has fallen to 11%.
Companies in fast-growing emerging markets have a huge need for qualified professional people and Hays — with offices in 26 countries — finds them.
That is where the growth is coming from and it plans to double the size of its overseas business in the next four years.
It is another example of the old adage that you make more money selling shovels to miners than you do digging for gold.
