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Investing in emerging markets has long been a bit like “plunking coins into a slot machine”, says Craig Karmin in The Wall Street Journal: you get a payout, but in general the odds are stacked against you.
However, in recent years things have been better. Since the crisis of 1997-1998, many emerging markets have overhauled their economies nicely; reducing debt, creating trade surpluses, increasing foreign reserves, and, crucially, becoming more open and flexible.
Money has been flooding in as a result. Since the end of 2002, the Morgan Stanley Capital International Emerging Market index has surged 128% (the Dow Jones is up just 31% in the same period) and the Institute for International Finance (IIF) thinks that net capital inflows will reach a record $345bn this year – beating the last high of $323bn, reached in 1996.
But is getting in now really such a good idea? Possibly not, says Forbes. With rates set to rise around the world, investor risk-tolerance may soon fall and there is risk in many emerging markets: “in particular, a further rise in oil prices would severely damage growth prospects for many oil-importing emerging economies”.
Yet despite this, they aren’t cheap. Shares in the UK trade on an average p/e of 14 times, but those in Peru are on 22.5 times and those in Romania on over 23.1. Not all markets are overpriced (you can still buy fine companies in Brazil for under ten times earnings), but the fact that so many are means that investors should proceed with caution.
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Annunziata Rees-Mogg
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