Growth – but not at any cost

Last week’s eurozone growth statistics showed much of the continent remains mired in recession. Germany, having emerged from the downturn, now seems to be sliding back, showing no growth in the last three months of 2009. Elsewhere, the UK is a dead loss, with inflation likely to career towards 4% when CPI numbers are announced this week and almost no economic growth, while Japan’s economic situation remains tough, at least in the short term. The US is seemingly the only developed market with any economic momentum. China and other emerging markets are having the opposite problem. They are growing at speed and monetary tightening is already on the agenda in China and is likely to happen elsewhere to cool soaring asset prices. These economies are the only areas demonstrating any organic growth. Worries that developed markets were entirely reliant on the stimulus packages to support growth are well-founded. At first glance, the solution as to where to invest looks easy enough. Go for the growth areas, surely? The developed economies are like the proverbial parrot – they have ceased to be, they have gone to meet their maker. But there are problems with this approach – investors should be suspicious of a creeping tendency for everyone to claim a connection to China or another major emerging market. This is reminiscent of technology, when everyone from logistics companies to holiday companies were claiming to be part of the tech revolution. The issue of valuation has seldom been more sensitive. It doesn’t matter how much emerging markets are going to grow if investors are overpaying for assets. In the end, technology grew by almost as much as was initially predicted with the internet achieving huge penetration. The winners of the technology revolution have seen double-digit profits growth year-on-year but it still doesn’t mean they were worth what people were paying for them in the late 1990s. Even if an investor is keen to introduce emerging markets into a portfolio, it can be cheaper to pick up emerging market earnings from UK-domiciled companies than it is from companies listed in, say, Hong Kong. Last week UK-based Rio Tinto and Xstrata beat expectations on the back of emerging market demand, for example. The question for investors is not simply ‘shall I buy an emerging market fund’ versus ‘shall I buy a UK fund’. They should be looking at the best places to obtain that exposure. Quite often it will not be in the countries themselves. For Investments and Savings Advice please call Mark or Clare at GMP Independent Financial Advisers LLP 0207 2886400