A game of risk
28 September 2009
Just 12 months after the chaos that erupted in the West following the collapse of Lehman Brothers, the question of ‘what next?’ is playing on many investors’ minds. Jenny Lowe investigates the options
With many of us devoted purely to financial conservation for so long, answering this question was always going to be problematic. Not so, however for professional investors, whose response has been unequivocal – its time to embrace a bit more risk.
Many have been doing so for months. Since May 2009 (generally accepted as when the economy turned – at least in the UK), there have been significant outflows of money from traditional safe havens – including money market funds. Much of this money has flowed into riskier credit and equity funds.
The biggest flows of cash are going into emerging markets. So far this year, inflows to emerging market equity funds have returned more than half of the outflows witnessed in 2008. Moreover, according to a recent study by Merrill Lynch, 70 per cent of industry professionals said that they believe the world economy will improve over the next 12 months and, as a result, are upping their equity stakes.
The report reveals that 46 per cent of managers are now overweight in emerging markets, compared with 26 per cent back in April. Support for China specifically is at its highest since the survey began tracking Chinese sentiment in 2003.
This is to be expected. China’s GDP is expected to jump around 9 per cent this year. It is already the world’s biggest exporter, has amassed the world’s largest US dollar reserves, and within the next decade could become the world’s largest economy.
In addition, the Chinese economy has received the biggest fiscal stimulus in the world as a proportion of its gross domestic product. Its government has pumped US$586 billion (£355 billion) into its financial system – the equivalent of 14 per cent of its GDP – and its banks are increasing lending by 30 per cent year-on-year.
All are hoping that Warren Buffett’s prediction that ‘the 21st century belongs to China’ will prove accurate.
So, if you don’t currently have exposure, how should you go about taking advantage of the growth opportunities in emerging markets? Well, responsible investors should have between 5 and 10 per cent in emerging markets (excluding property and pensions), and there is a swathe of unit and investment trusts to choose from focusing on China and other emerging markets such as South Korea, Malaysia, Indonesia, Singapore and India.
For the more active trader there is a plethora of ETFs available, or you could invest directly in large UK companies that have significant exposure to this region. Those looking for a really exciting ride could back some of the smaller UK-listed companies with serious emerging market positions.
Whatever your risk profile or interests, this month’s issue of What Investment gives you a wealth of analysis, options and ideas on how to make the most of the prospects on offer – and as ever, we have endeavoured to assist you in reducing the risks as well.
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