However, 'Emerging Markets' is a real rag-bag of a label, including diverse states such as the BRIC and MINT countries as well as dozens of smaller administrations.
It's time for a review: is this reckless madness or inspired opportunism?
First, what are 'Emerging Markets'?
- Wikipedia defines is as 'a country that has some characteristics of a developed market but is not a developed market'. Err... right.
- Investopedia is a bit more helpful: 'Emerging markets generally do not have the level of market efficiency and strict standards in accounting and securities regulation to be on par with advanced economies (such as the United States, Europe and Japan), but emerging markets will typically have a physical financial infrastructure including banks, a stock exchange and a unified currency.' A bit clearer...maybe?
- Look at the map...
I like to think of EMs as the 'Wild West' of investing (or possibly the 'Wild East').
Some time ago I decided that basing the portfolio on the economic fortunes of the UK and the Pound Sterling was perhaps short-sighted. This led to a geographical diversification, facilitated mainly via Exchange Traded Funds (ETFs), which provide wide diversification at a relatively low cost and with no tax administration complications.
One portion of these ETFs is focused on Emerging Markets, including both dividend shares and fixed-income securities:
- SPDR S&P Emerging Markets Dividend ETF (LSE:EMDV)
- SPDR Barclays Emerging Markets Local Bond UCITS ETF (LSE:EMDD)
- iShares Emerging Markets Local Government Bond UCITS ETF (LSE:SEML)
However, all of these are showing losses (in the case of EMDV, substantial losses) - although I have topped up 'on the way down'. So I'm a bit out on a limb here.
In addition the portfolio has other shareholdings that are aligned with the fortunes of Emerging Markets:
- City of London Investment Group (LSE:CLIG) - operating funds focused on EMs
- Anglo Pacific Group (LSE:APF) - investing in raw-materials mining royalties in EMs
Why oh Why?
The reason for this enthusiasm in things emerging is simple: high yield. The strategy - such as it is - of the DIY Income Investor portfolio is to look for trouble - or rather to look for the higher yields that indicate that Mr Market is worried about particular investments. Having Mr Market lead us to these troubled investment opportunities, the only (!) thing left to do is make our own assessment of the risks and then maybe take a limited and calculated punt on his being over-cautious.
It will have escaped few DIY investors that one of the key developments of the past year has been a slump in the value of EM shares. There is a narrative to that which probably goes along the lines of:
- reduced demand in China for raw materials from EMs
- reduced demand in developed economies for the produce of EMs
- financial or political instability in some of the EMs
However, this looks to me as if it has been overdone: the EMs have large populations and the most dynamic economies (unfortunately this can be dynamically down as well as up).
Ukraine if you want to
Events in Ukraine have shown how fragile investor confidence in these frontier markets can be. Putin's 'masterstroke' invasion of Crimea shows that even the most experienced and powerful leaders can screw up big time.
The markets reacted dramatically: down one day, up the next. In fact, as of the time of writing, it was remarkable how little the markets actually reacted to what was a textbook repeat of Hitler's invasion of Sudetenland. Mr Market has discounted the risks - he got is wrong on Day One but corrected on Day Two. Maybe.
Head for the sound of the guns
Having liquidated a chunk of the portfolio I am casting around for attractive opportunities. None seemed more attractive that CLIG (mentioned above). At a current yield of 10% this tops my yield league table. Moreover, the latest update (March 2014) portrays a situation that appears to be stabilising, plus a commitment to the existing dividend policy. There will be a further update in July 2014.
With my Wild West Stetson on my head I have bought some more CLIG - quite a lot actually, and in two lots - making this the portfolio's largest single holding.
Wish me luck!
[Purchase price: £2.5039 and £2.55]
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.