The ride is bumpy now, but patience and a 20-year view could lead to solid investment solutions for the future.Harvey Jones reports
You've probably been watching in horror as the financial crisis ravages your pensions and investments.
Every time the euro zone crisis flares up, it torches another chunk of your wealth.
With stock markets falling by up to 3 per cent or 4 per cent in a single day, you can be thousands of dollars poorer in a matter of hours. It hurts, no question about it.
You might even be wondering why you invested in the stock market in the first place. Why didn't you place your money in nice, safe, boring cash instead? What were you thinking?
It's a natural reaction. Nobody likes to lose money. But for most people, it is also the wrong reaction.
Unless you are retiring shortly, or need to sell your investments for any reason, short-term volatility shouldn't do you any harm at all.
In fact, it can be a great opportunity, allowing you to pick up great-value shares at low prices.
What really matters is what happens to stock markets between now and the day you retire, when you will finally call on your portfolio to pay for your pension. That could be a decade or two away - and a lot could happen in 20 years.
If you are investing over such a lengthy period, you can't simply leave your money in cash, says Steve Gregory, the managing partner at the Dubai-based Holborn Assets, a financial services company. "If you left US$10,000 [Dh36,733] in a cash account earning 2 per cent, it would take 36 years to double in value to $20,000. That isn't going to build you an adequate pension."
In the long run, cash isn't even safe. "Quite the reverse," Mr Gregory says. "It is doomed to failure because your money won't even keep pace with inflation. In real terms, you will almost certainly end up with less money than you started with."
Stocks and shares can give you a much more rewarding journey - if you can stand the turbulence. "If you invest $10,000 and it grows at 6 per cent a year on average, your money will have doubled in just 12 years. At 8 per cent a year, it will double in just nine years."
Everybody needs some cash they can instantly access for emergencies, but shares and funds are a far better way to save for the future, Mr Gregory says.
"Many companies yield generous dividends of up to 5 per cent a year, far more than you get on cash, and that's on top of any capital growth. In the long term, this should produce better returns."
But you need to brace yourself for a bumpy ride. If the euro goes into a tailspin, you might even need a crash helmet. "The recovery will eventually come and when it does, shares could rebound sharply," Mr Gregory says.
One of the key questions to ask yourself is this: how long am I investing for? If you're looking to draw your pension in the next couple of years, you should already be reducing your exposure to stock markets. Shares are too risky over such a short time because you don't have enough time to recover any losses. Cash and bonds are dull, but a lot safer.
If you are investing for 10 or 20 years, you have to play a much longer game.
The world will look very different in 2031. The euro may be a distant memory, or a rump currency comprising Germany, the Netherlands and Finland. We will have forgotten all about George Papandreou, the Greek prime minister. Although forgetting Silvio Berlusconi might take a little longer.
The financial crisis itself might be a historical footnote, but it is likely to have one lingering long-term effect: accelerating the shift in global power from West to East, says Tom Elliot, an economist at JP Morgan Asset Management.
"In 20 years, countries that are now classified as emerging will be fully developed," he says. "Brazil, Russia, India and China [Bric] are set to continue growing until they are as rich as the West. Emerging markets will put the developed world in the shade, with big implications for investors."
Frontier markets that you would never consider investing in today could be firmly established. "Any country with open markets and strong institutions can repeat the success of the Brics, from Angola to Mongolia, Bangladesh to Pakistan," Mr Elliot says.
Emerging markets have major structural advantages over the West, including young populations, low levels of debt, fast-growing economies and minimal welfare obligations.
The future belongs to them, yet too many investors are still fixated on the ageing West. "As the baby-boomer generation retires, the West will become top-heavy with pensioners. Young people will have to pay higher taxes to meet the burden and have less disposable income as a result. Consumption and growth rates will fall," Mr Elliot says.
This doesn't mean you should shun western companies altogether. Quite the reverse. Many US and European blue chips have positioned themselves to cash in on the emerging-markets boon. "Companies listed on the FTSE 100 and the S&P 500 already have massive exposure to emerging markets and this will increase. If you are nervous about investing directly into Brazil and India, this could be a good place to start," Mr Elliot says.
Global giants such as Nestlé, Unilever, Reckitt Benckiser and Volkswagen make a growing share of their profits from consumers in emerging markets, as do luxury western brands such as Burberry, LVMH, Louis Vuitton, Tiffany and Mulberry.
You can invest in emerging markets through mutual funds such as Fidelity South East Asia and Templeton Frontier Markets, both of which are available offshore, says Adrian Lowcock, the senior investment adviser at Bestinvest, the UK-based financial services company.
He says population growth will be another major global trend. "The global population recently hit seven billion and is set to peak at around 8.92 billion by 2050, according to UN estimates. Over the next 20 years, energy consumption is set to increase 40 per cent and electricity demand by 76 per cent. This will boost competition for global resources, forcing up prices."
Mr Lowcock says far-sighted investors could benefit by investing in a mutual fund such as First State Global Resources or JP Morgan Natural Resources, both of which are available offshore.
As the global population keeps rising and emerging-market consumers seek western living standards, demand for food should rise 50 per cent by 2030, according to the World Bank. Meeting that demand should prove quite a challenge, especially since industrialisation and urbanisation are reducing the amount of arable land.
The world's growing demand for food is encouraging farmers to use more fertiliser, such as phosphate and potash, to increase yields, says Ariv Vatis, a portfolio manager at Fidelity American, the mutual fund. "Stocks such as Potash Corp, Uralkali, Industries Qatar and Mosaic outperformed significantly during the last episode of food inflation," he says. "Valuations are now more reasonable, yet the long-term fundamentals remain very attractive."
As an emerging-market middle class establishes itself, investors should anticipate growing global demand for mobile phones, western fashions, soft drinks, cosmetics, fragrances, toiletries, household goods, home electronics and automobiles.
Global companies such as Nestlé, Coca-Cola, PepsiCo, BMW and Volkswagen should reap the benefit. So should emerging-market challengers such as Brasil Foods, China Mengnui, a dairy producer, and Sberbank, a Russian bank.
The rise of emerging markets won't be a smooth and steady procession. These countries still face massive challenges and will endure plenty of stumbles along the way.
Brazil and India have desperately been trying to stop their economies from overheating. China is haunted by the prospect of a property bubble. Russia is still riddled with corruption. All have suffered contagion from the sickly West. Over the past 12 months, the Chinese stock market fell 17 per cent, while India plunged 22 per cent and Brazil dipped 12 per cent. Russia performed best of the Brics, but even it fell 2 per cent.
If you're investing with a 20-year perspective, this won't worry you. In fact, you might consider it a great time to invest because you are picking up shares cheaper than a year ago.
There will be other bubbles and blips, but it is the long-term trend that matters to you. And where emerging markets are concerned, most analysts believe it will be positive.
Emerging markets are leading global economic growth, says Gavin Smith, the area manager for the Dubai-based wealth adviser, PIC. "They are set to grow by 6.4 per cent this year, four times faster than developed nations, according to the IMF."
If you are still spooked by today's volatile stock markets, Mr Smith says you can reduce the risk by investing small, regular monthly sums in stocks or funds. "This way, you actually benefit when share prices fall because your monthly contribution buys more stock or units when prices are low."
Investment is a long-term game. You need to tune out the short-term noise and focus on the future. And right now, the future looks like it belongs to emerging markets.
