“Emerging” markets; will they help fund your child’s school fees?

Investment markets can go down as well as up, but looking at last year’s relative performance round the world, it would be all too easy to assume that some markets will always do well.

This is simply not true, although new markets tend to do comparatively better than established ones simply because of the positive inflow of cash. In practice, emerging markets such as China, Brazil and India may look attractive, but carry with them substantial risks.

Looking at our own past, it is all too easy to draw comparisons with the “South Sea Bubble” of the early eighteenth century (which is hopefully something that will be returned to the national curriculum as an important lesson in finance). In that case speculators “talked up” stock in a highly risky venture which had dubious (to say the least) prospects based on the anticipation of access to South American Gold, which never materialised, partly because Spain was blocking access to the ports concerned. The result was that investors lost substantial amounts of money and never really had the prospect of getting their investment back, let alone turning a profit.

The point is that investment performance is largely driven by sentiment and the availability of capital seeking a home; the underlying fundamentals are often so very different. Long term investment outcomes depend on economic stability, sound markets and good management.

This means that investing needs to take account not of how markets have been moving in the past, but how they are likely to move in the future, comparative to the current position, based on the likelihood of sustainable growth.

It may thus be seen that China and India, given political and social stability, could be expected to provide long term growth based on a low cost base and massive internal demand, which means that they are only partly dependent on exports. By comparison, Japan, which has a well established free market economy and a secure political base has high internal costs and is dependent on exports to keep it afloat.

Does this mean you should invest heavily in the former while ignoring the latter? In all probability the answer is “no”. This is because nobody can predict what will happen in future; political and economic circumstances can change quickly; a world recession could hit China and India just as much as the UK.

What this should tell us is that putting all your eggs in one basket is unsafe and that it is important to have a diverse asset distribution strategy. It also tells us that few individual investors will have sufficient knowledge to make decisions on their own and that collective investments are likely to be most suitable for most people. The costs are higher than direct investments, but the risk far less onerous.

Investment diversity means that you do not have to rely on picking the winner (like China last year) and risk it falling at the last fence (like Ireland last year). You may miss out on the biggest potential wins, but you will also avoid the largest potential losses. On average, you can expect to do better by selecting a varied investment strategy.

It is important always to seek independent financial advice before making any decision regarding your finances. If you would like any assistance, please contact your financial adviser.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.

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