Alex Duffy, Fidelity’s portfolio manager, recently discussed this opportunity with Nestegg.
What is the advantage of emerging markets?
There are two main advantages with emerging markets: the opportunity to invest in an untapped market and diversification.
“The unique opportunity that emerging market presents is really their size to all investors, you have large under-penetrated markets with multiple gross opportunities,” said Mr Duffy.
“Whether that’s the fact that in places like Indonesia only 25 per cent of the population have a bank account. Whatever the case may be, these are large markets starting from low level of penetration of pretty much every line of consumer products and that growth opportunity is very unique,” said Mr Duffy.
The second aspect is the diversification that it offers due to foreign markets being completely different markets.
“When you look at Asian countries, for the most part, technology industries, local consumer industries, less commodity exposure than an Australian perspective… So drivers that are not correlated to the Australian industry,” said Mr Duffy.
How can you invest in emerging markets?
Mr Duffy believes that the first step investors need to do before investing in emerging markets is being prudent. The company needs to have an alignment of interest from both a managerial and shareholder perspective, for example.
The second step is to focus on what companies are doing to earn large cash flows, making sure it cannot be competed away.
Thirdly, when an investor has a good idea, it’s important to own them in size so that it can make a meaningful contribution to your asset portfolio.
Finally, it is important that investors take a long-term view into the company and not chase excessive returns in the short term. It is important to look at three, five and 10 years into the future.