Everybody loves an emerging market. The catch-all term to describe the economies of more than half of the world conjures up exotic images of sun-drenched sandy beaches on far-flung islands with low tax and huge potential for economic growth. Don’t let that idyllic scene be obscured by government corruption, lack of infrastructure or the fact that your investment will probably fund the building of a motorway over that beach.
The emerging markets universe is so broad that, even when the sector as a whole is showing negative returns (as the MSCI Emerging Markets index did at the end of last year, collectively dropping 1 per cent in December), there will always be stories of double-digit returns to enthuse and entice the romantic.
I suspect, however, that many who are so enamoured with the idea are not clear exactly what defines a market as ‘emerging’. The word is probably often used to describe what are technically ‘frontier’ markets. It is fuzzy when exactly a country becomes ‘emerged’. When MSCI downgraded Greece from developed last year, there was no option but to reclassify it as ‘emerging’, as if it had retreated back into its cocoon a little, but was still planning on popping out later.
However misunderstood, investors’ love affair with emerging markets has been further fuelled since the turn of the century by the consistent performance of the Brics – Brazil, Russia, India and China have been one of the big success stories of this century so far. Having been thrown together in a handy acronym in 2001 due to comparable economic prospects, for the next decade they were all the rage.
But even when they were first grouped, some questioned how similar they actually were. China and India’s growth was expected to be driven by each country’s huge populations, while Russia and Brazil were chiefly fuelled by natural resources. All four economies performed well though, so it was easy to continue thinking of them collectively.
Recently, a demographic shift has seen a divergence of the Bric countries’ fortunes. Now, 13 years after the term was first coined, China and India hardly seem such obvious bedfellows any more and Brazil’s position looks more precarious than Russia’s.
This hasn’t stopped the search for a new group of nations to whip up excitement. We’ve had Civets (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and the Next 11 countries. A year or two ago, there was a buzz around a similar grouping of ostensibly disparate economies in Canada, Australia, Switzerland, Singapore and Hong Kong, but Cassh never really gained any currency.
Undeterred, the marketing bods have come up with a new supergroup of awkwardly bundled nations in Mint.
Mexico, Indonesia, Nigeria and Turkey have some key demographic characteristics that make them comparable. Notably, each has a ratio of people of working age versus people in retirement that is the envy of many so-called established economies.
But they also have quite a few distinguishing features that make them different from each other. Political uncertainty in Turkey and Nigeria makes growth there more uncertain than the relatively stable Indonesia and Mexico.
I am sure each of these markets individually has its own merits. Undoubtedly there is a reason to invest in each, but why group them together? Are they really economically correlated? Are they even economically comparable? Or do they just fit neatly into a handy acronym with vague suggestions of making money?
The next logical step is to rebrand funds with a significant African exposure as Benin, Algeria, Namibia, Djibouti, Western Sahara, Angola, Ghana, Oman and Niger funds?
Several emerging markets undoubtedly offer value at the moment. That will probably always be true. But it is up to a fund manager to identify those markets and allocate to them accordingly. It may be that a manager believes Mexico, Indonesia, Nigeria and Turkey to be the markets that currently show the most potential, in which case they should invest in them. However, that decision should be based on each country’s individual merits, not because their initial letters can easily be shoehorned into an acronym to make the fund easier to market.
If the vehicle was labelled simply as an emerging markets fund, the manager would be equally free to reduce exposure to whichever of the quartet have fallen out of favour in one, three or five years’ time.
As an industry, investment houses are always looking for new labels to make their products seem new. Whether ‘absolute return’, ‘130:30’ or whatever the next thing is, the market is awash with unnecessarily complicated nomenclature when most investors would be satisfied with a simple option that does what it says on the tin. Investment houses should focus on substance rather than style and come up with products that are sold by their investment process, and then judged on performance rather than slogans.
It should be enough to offer an emerging markets fund, without having to resort to acronyms to sell it. Most investors who want emerging market exposure will not have a preference for such arbitrarily grouped geopolitical regions as Mint and they won’t be served by being tied to them if – or when – things go wrong.
