Tuning into the emerging success story

PUBLISHED : Sunday, 11 September, 1994, 12:00am
UPDATED : Sunday, 11 September, 1994, 12:00am

INDIA is one, so is Poland - and China has been considered one since B shares became available to foreigners in 1991.

What these countries have in common is the tag of 'emerging market', the name given to an economy that has the potential for, or is already enjoying, rapid growth.

But emerging markets are not necessarily Third World countries. Rapid growth can be the result of a variety of economic and political conditions.

Many African countries are emerging markets. So, too, are Greece and Portugal, as well as parts of Eastern Europe, Latin America, the Middle East and Asia.

Emerging markets generally experience far faster economic growth than developed countries and their stock market potential can be far greater.

In terms of world economies, emerging markets account for 18 of the world's 30 largest economies, 71 per cent of the global population and 41 per cent of total world Gross Domestic Product.

Despite these impressive figures, the size and strength of emerging markets are not reflected in their stock markets.

At the end of 1992, emerging markets accounted for only seven per cent of the total value of world stock markets.

But, with their growth potential comes high volatility. Emerging markets often give a bumpy ride and pose a dilemma for small investors.

Unit trusts - where individual investors pool their money and benefit from specialised management - are the best way into these new markets.

Some emerging market funds spread investments over a number of countries, reducing the effects of individual currency fluctuations or other upheavals. Others focus on a single country or region and tend to be more volatile.

There are about 15 emerging market funds managed by members of the Hong Kong Investment Funds Association. The newest arrival is the Global Emerging Markets Fund, which was launched last week by Guinness Flight Asia.

'The logic of investing in emerging markets is compelling,' said Guinness Flight Asia managing director Dudley Howard.

'In the next 10 years, development in emerging markets will grow at five per cent, or double the 2.5 per cent growth figure forecast for developed countries.' Guinness Flight believes that after the investment rush into emerging markets in September last year and the correction that followed earlier this year, the time is now right to move into these markets.

'Most emerging markets have started to recover, and the cycle of demand for commodities from developing countries is clearly on an upswing,' Mr Howard said.

As part of its asset allocation strategy, Guinness Flight has divided emerging markets into three categories.

China, Sri Lanka, Colombia, Peru and Eastern Europe are judged as 'embryonic'. The Philippines, Thailand, India, Argentina, Brazil, Chile, Portugal and Turkey are classified as 'industrialising'.

Markets judged to be approaching maturity are South Korea, Taiwan, Malaysia, Mexico, Israel and South Africa.

The new fund, which was launched to British investors in June, is still small, with just $50 million so far invested, but has already achieved growth of 10 per cent. The fund will be managed by Guinness Flight director Francis Seymour and the minimum investment is $80,000.

People who invest at least $400,000 during the launch period, which ends on September 30, will not have to pay the five per cent front-end load.

All other investments during the launch will qualify for a one per cent discount. According to Mr Howard, Guinness Flight is well positioned to manage the currency risks inherent in all emerging market funds.

'Guinness Flight has always been a global asset manager and has built its reputation on identifying new opportunities and managing risk levels,' he said.

'Diversification also enables you to spread timing and risk so that not all of the portfolio goes up or down at the same time.' Guinness Flight's emerging markets fund is currently invested in more than 18 countries, with larger weightings in Mexico, Malaysia, South Africa, Argentina, China and Brazil.

Mr Howard said investors should set aside about 10 per cent of their portfolio's equity investment for emerging markets.