You may already be aware that the first investment company was launched 150 years ago to give “the advantages of a pooled approach to investing to the investor of moderate means”. But what you may not know about Foreign & Colonial and its early followers is that it saw the biggest opportunities in emerging markets – and in the 1800s, this meant the US.
Annabel Brodie-Smith, communications director of the AIC, said: “A lot can happen in 150 years – looking back, in 1868 the US was the emerging market to invest in, it’s now the world’s largest economy.
“Today’s emerging markets continue to offer interesting opportunities to investors and investing through the closed-ended structure can help investors access what can sometimes be an illiquid asset class.”
Brodie-Smith added that while the AIC Global Emerging Markets sector has struggled over the past decade, it has made 848 per cent in the 25 years to the end of April 2018.
“Although we don’t have a crystal ball to see into the future and tell us which countries will achieve significant growth, it’s very interesting to hear which countries emerging market managers think are the ones to watch,” she said.
Below a selection of investment trust managers reveal which emerging markets they think are best placed to follow in the footsteps of the US over the very long term.
Terry Smith
Terry Smith (pictured left), manager of the Fundsmith Emerging Equities Trust, said that if he were asked to name an emerging market that may one day emulate the experience of the US, he would choose India.
“Why? India is a democracy,” he explained. “In fact, it is the world’s largest democracy – the US is second in size of electorate.
“Whilst it is certainly possible to create a lot of value in a dictatorship or one-party state, peaceful transitions to democracy are rare and so any regime change in those countries may be disruptive and in the interim there is no rule of law enforced by an independent judiciary.”
The manager said this is important as there is no point in identifying a successful national growth story only to find that some or all of the value of your investments is stolen from you.
He added that India has both the rule of law and an independent judiciary and ranks highly in most surveys of protections for minority investors – which brings him on to another powerful long-term tailwind.
“Whilst I am naming a country, you don’t invest in a country,” he continued. “You invest in the shares of companies and India is a repository of some of the highest quality consumer businesses in emerging markets in my view.”
In a recent article on FE Trustnet, a number of analysts said a buying opportunity may have opened up in India – although the market has fallen further since then.
Data from FE Analytics shows the MSCI India index has made 82.84 per cent over the past decade, but is down 8.43 per cent in the year to date.
Chetan Sehgal
Chetan Sehgal, manager of the Templeton Emerging Markets Investment Trust, is also positive on India, but said China could experience a similar trajectory. For example, he noted these were the two largest economies in the world in terms of GDP up until the 19th century, when they were overtaken by the US.
“Fast-forward to today, China is the world’s second biggest economy after the US, and is about five times larger than India, which is expected to overtake the UK to become the world’s fifth largest economy this year,” the manager said.
He also pointed out it is not just about size – the International Monetary Fund predicts China and India will grow by 6.6 per cent and 7.4 per cent respectively in 2018, ranking them among the fastest-growing major economies in the world. This is a trend he said is expected to continue for the foreseeable future. The UK, in comparison, is expected to grow by 1.6 per cent.
“Together, India and China account for over a third of the global population, which brings with it huge potential, both in terms of consumers and labour,” he added. “The rapid adaptation of information technology in emerging markets such as India and China has further propelled their strong growth trends.”
Data from FE Analytics shows China has made 133.8 per cent over the past decade.
Ross Teverson
Ross Teverson (pictured right), co-manager of the Jupiter Emerging & Frontier Income Trust, agreed with Sehgal about China being the obvious example of an emerging market making rapid economic progress. He said this is evident from the large number of Chinese companies that rank among the largest and most innovative in the world.
However, he pointed out there are many frontier markets that, while they may have a lower profile than China, also have the potential to experience significant structural change in the coming years.
“For example, within sub-Saharan Africa, we see a number of attractive long-term investment opportunities resulting from rising financial inclusion, as well as improved infrastructure, communications and technology,” he said.
“Gradually increasing penetration of financial products, combined with remarkable demographics – the median age in Kenya is just 20 years – should create a backdrop that, for well-placed financial institutions operating in the region, should prove conducive to strong and sustained earnings growth for a long time to come.”
The MSCI Kenya index has made 227.82 per cent over the past decade, but has seen some severe volatility along the way, with dips of 40 per cent or more taking place on three separate occasions over this time.
Performance of indices over 10yrs
Source: FE Analytics
Sehgal said another frontier market in a powerful position is Vietnam. He said it is one of the most populous emerging markets, with approximately 100 million residents, and is also one of the fastest-growing economies, with GDP growth in 2018 estimated at 6.6 per cent.
“The high growth potential in Vietnam is driven by a combination of factors, including favourable demographics and urbanisation dynamics creating a large domestic consumer market, low penetration of goods and services, and the opportunity for technological leap-frogging, allowing growth in economic infrastructure and efficiency gains,” he finished.
The MSCI Vietnam index has made 129.49 per cent over the past decade.