Morningstar urges caution on emerging markets

The challenge for investors and advisers when it comes to investing in emerging markets is harnessing the benefits of anticipated sustained economic growth of developing markets, while also avoiding potentially extreme volatility.

That is one of the points flowing from Morningstar’s ‘Meeting the Challenge of the Emerging Markets’ report, which found there were favourable outlooks for the asset class.

Over the 10 years to 31 January, 2011 the MSCI Emerging Markets Index AUD generated a return of 7.49 per cent per annum, while developed markets struggled to compete with negative 3.88 per cent, the report said.

However, research analyst John Valtwies warned history proved how volatile emerging markets could be.

“The emerging markets index fell 29 per cent in one day after Russia defaulted on its sovereign debt in 1998, for example,” Valtwies said.

“When this volatility is compounded by movements in the Australian dollar — which fell 40 per cent from peak to trough in three months in 2008, for instance — this can be a recipe for extreme volatility,” Valtwies added.

The report suggested that advisers and their clients should invest with a global manager that owned developed market companies with revenue streams generated in the developing world.

“You want to make sure when you are investing in emerging markets that an event like 2008 [the global financial crisis] doesn’t wipe out your capital because you had a 100 per cent exposure to emerging markets,” Valtwies added.