Emerging

If I had to pick the next investment calamity over the coming couple of years, I might go for Russia.  The reason is that investors seem to have the unerring knack of pulling out of one problematic investment and piling into the next. 

Not long ago, so much money was pouring into Property funds that the regulator had to express misgivings.  Now, a year or so later, those same people are hastily withdrawing their money amidst lurid headlines about the sector imploding.  By the look of things, these people are not giving any more considered thought to their investment objectives than they did the last time, or the time before that.

It does make you wonder what these people or their advisers are thinking.  It does seem that a large proportion of investors have no strategy whatsoever and simply charge around looking for last year’s best performer.  The problem is not that many investments will not deliver, it is that a lot of investors do not stick around to benefit.

The legendary Peter Lynch who ran Fidelity’s flagship Magellan fund very successfully into the Nineties said that his greatest regret was that many of the fund’s investors had just not benefitted from his performance because they had bought and sold at the wrong time rather than just sticking with it.

For anyone whose time horizon runs beyond next Tuesday, it may pay to try to develop a little patience.

If you are the type of investor who habitually chases last year’s performance, you will, no doubt, be about to commit a significant proportion of your portfolio to Emerging Markets.  The MSCI Emerging Markets Index was up 35% last year (so long as you measure your wealth in dollars, that is) and has quadrupled investors’ money over the last five years.  With Commercial Property out of favour and Equities in Developed Markets seemingly dogged by uncertainty (is there ever much certainty about the future?), history would suggest that money will be heaped upon those sectors which can show a strong recent showing.  The question for rational investors is whether this makes sense.

There are two ways of trying to answer this, although both are unlikely to be truly accurate.  Firstly, we can fall back on analysis of the fundamentals, e.g., comparison to historic valuations or economic outlook, knowing of course that life is rarely that simple.  Secondly, we can apply the coin flippers technique and wonder whether we can throw heads yet again.  This is not the place to broaden the discussion into statistics but it would be wise to consider how likely the Emerging Markets sector is to do so well over the next five years.

Most of us, however, will simply place our belief in diversification, happy with the comfort it brings and secure in the knowledge that we do not have all our eggs in one basket.  If you have a hunch about the coming year, it might not hurt to punt a very small amount on it, if only for interest.

There is some evidence (courtesy of the IMF) that the economy in Sub-Saharan Africa is growing faster than the world as a whole.  Not by much but when you consider the considerable effort some of its governments put into preventing any growth, this has to be seen as good news.  It still lags behind the Developing World, taken together, but a case is starting to emerge for including the continent in a portfolio.  I expect that this resurgence is a little fragile; were China, for example, to lose its need for African raw materials, things could take a turn for the worse.

Also, despite the enthusiasm of some fund management companies, it is not an easy place to invest and the local stock markets will not have much capacity for major inflows of capital.  In investment terms, Sub-Saharan Africa tends to mean South Africa plus stocks in companies involved in mining, for instance.  The political risks are considerable in much of the continent and it is probably a long way off being seen as a new China were, for all its faults, the government is seen as stable and not wholly irrational.

It is all getting a little hairy in the markets at the moment; all major markets posted significant falls yesterday and the news may not be much better today.  Are we witnessing (or, for those of us with investments, experiencing) the final act in the credit crunch tragedy or merely another scene?  Also, what course of action should a rational investor take?

No one can be sure where this crisis is heading; quite a few problems have been brought to the fore but there may be more to come.  It is almost laughable now that, only a matter of weeks ago, our august politicians were focused on the rate of tax paid by Private Equity to the extent that they restructured our entire tax system in an attempt to penalise them.  Meanwhile, in the real world, things were going pear shaped.

Poorly diversified investors may have the least comfortable experience, particularly those poor private investors who held significant chunks of Northern Rock stock for no real reason.  Also, those with too large a proportion of equities may find themselves ruing their lack of investment spread and property looks set for a difficult period.

What is holding up?  Well, the bond markets, unloved of late, may find themselves viewed more favourably (especially government and high quality) and commodities may continue their climb.  But it seems, oddly enough, that emerging markets may emerge (pardon the pun) the real winners from this period of instability.  A year or so from now, they may look quite grown up, while some of the racier classes of investment, such as private equity, may look a little discredited (another pun?).

As ever, the advice to any investor is to ensure that you are properly diversified.  Do not get drawn into this year's must have (or have not) sector and only invest if you have a long term outlook.