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Active Retirees : Active Retirees Feb-March 2013
recommended’ a number of emerging markets funds including Aberdeen Emerging Opportunities and Fidelity Asia. But Paul Banner, principal financial adviser at Provenance Advice, says that because of historic volatility and a lack of income, he would not expose a retirement portfolio to emerging markets equity. A less risky way to tap into emerging markets is available: investing in companies that are listed and domiciled in the developed world, but that do a lot of work in emerging markets. An example is YUM brands, a US fast food company capitalising on a rising middle class in emerging markets FIND OUT MORE Visit the finance section of the PSPL website. W: www.probussouthpacific.org and their demand for western-style fast food. “This is a less risky form of emerging markets exposure and I do see merit in a modest inclusion in a retirees’ portfolio,” Banner says. Thornber says companies such as BMW, Coca Cola and Swatch are enjoying significant sales growth from emerging markets. A major exposure to emerging markets in recent times has been commodities companies, such as BHP Billiton and Rio Tinto, which export to emerging markets. Stability on the horizon? Over the next 10 years, emerging markets may become less volatile as big investors such as pension funds allocate more capital to them and help them to mature and stabilise. Institutional investors currently allocate around three to five per cent to emerging markets; Sweeney expects that to increase to up to 10 per cent in the next five to 10 years. In the meantime, they do remain volatile and, along with a lack of income generation, that probably means retirees should limit exposure. “Emerging markets equities should be a minor allocation of retirees’ global equity allocation,” Sweeney says. The good news is that through western companies operating in emerging markets, most investors already are tapped into their potential upside without full exposure to the risks. •• EMERGING MARKETS 101 What is an emerging markets equity? The term usually refers to equities in developing but fastgrowing economies, such as China, India and Russia. They are typically viewed as providing higher returns, but, in turn, carry higher risk; they tend to be more volatile than stocks in developed countries. Emerging markets equities tend to be defined by indices, such as the MSCI Emerging Markets Index, which covers 21 countries including South Africa, Brazil, Egypt, Turkey and Peru, and the so-called BRIC countries Brazil, Russia, India and China. China, with 17.9 per cent, has the largest share of the index. Michael Collins, an investment commentator with Fidelity Worldwide Investments, notes that some ‘emerging markets’, such as South Korea are in fact quite developed and have major corporations, such as Samsung and Acer, listed there. Countries also drop in and out of the index. Emerging economies tend to have higher political risk and less transparency, and their financial infrastructure is typically less developed. That can make it hard to access stocks in those countries, and make it harder to buy and sell. But emerging economies are deemed to have a greater upside. The International Monetary Fund is forecasting emerging economies to grow between 5.6 to 6.2 per cent annually over the next five years. Active RetireesTM | 39
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