Emerging markets to remain robust: GGOF

Despite rising inflationary pressures, emerging markets will continue to be the place to park those long-term investments, according to Guardian Group of Funds.

Speaking on a conference call Tuesday, David Harding, managing director, said that while emerging market economies are still seeing rapid growth, rising inflation could slow things down. “That’s the one thing that probably scares the Chinese government more than anything,” he says.

“[The government] would be extremely concerned about anything where you’d get a sustained rise in inflation,” he says. “We’re seeing it at the moment, a little bit, in food in China, but it would take drastic measures to cool down the economy.”

Gavin Graham, GGOF’s chief investment officer, does not expect inflationary pressures to be “tamed” in the long run, though a slowdown in the U.S. economy might offer temporary relief.

He adds that GGOF is looking closely at China and India to see what will happen with their inflation rates. “The reason we are focusing on inflation is the continued growth of the middle class in emerging market economies. China and India have seen 300 million consumers all wanting to emulate the lifestyle they see the middle class in developed economies enjoying.”

But even with inflationary concerns, the emerging markets are still growing at a quick pace, which is good for investors. Harding points to the deregulated housing market in China as proof that the country has a lot of growth potential.

In the mid-1990s China allowed people to buy private property for the first time. That means a large number of citizens can own their own homes, which in turn has created increased consumer demand. “What it’s really done is allowed a sense of ownership to take place among the population. It’s meant that people now own their apartments rather than rent, and anyone knows if you own a house, you’re going to spend a lot more money on [it]. It creates a cycle of upgrades on home improvement and puts people on a cycle of upward movement up the property ladder.”

Another indicator of the emerging markets economic growth is that banks have shifted their focus from corporations to the consumer. Ten years ago banks were seen mainly as an arm of the government that funded economic development, but today these institutions see the consumer as a possible revenue stream.

Still, China’s and India’s consumers are vastly underleveraged compared to those in developed nations. “In Asia what you’re seeing is a situation where people have so little leverage that they are moving to a position where they can borrow more money and use that to purchase assets, in particular property,” says Harding.

As consumer demand grows and financial institutions develop, Harding notes that it’s unlikely emerging economies will revert to the problems they had in the past. “There are issues with economic management, inflation and those sorts of things, but the underlying story is the direction and growth of consumption in these economies will continue, and it’s broadening.”

“This is really demand driven,” says Wally Kusters, managing director, Barrantagh Investment Management. “What we’re seeing on a resource cycle is something that happens once or twice every century. Demand is so large and supply can’t respond.”

Because of this imbalance, Kusters says, there’s a “great long-term view for resources and resources demand in general.”

He explains that investors can’t confuse the short-term market turmoil and the long-term demand that’s still “definitely there.”

“This is a coordinated cycle,” he says. “An economic event that’s going to be very lasting. We’re talking [about] putting infrastructure in place; we’re not even talking about consumer demand yet.”

Clearly, there are a lot of investment opportunities in the emerging markets, but Graham suggests investors consider looking at the REIT sector. It’s true that REITs are down all over the world, including China, but the “sell-offs have restored value to the market,” he says.

A big upside to owning real estate is that it’s a good hedge against a global economic slowdown, adds Graham. “Unless we see major slowdowns in every part of the world, it’s unlikely that a world-diversified global real estate portfolio is going to be adversely affected.”

He admits that the U.S. housing crisis will have an effect on commercial real estate, but as long as growth in China stays the course, the demand for property in the Asian markets will “continue regardless.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(12/11/07)

Bryan Borzykowski