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Geo-political risk could impact global demand and GDP

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Andrew Herberts, head of private investment management, Thomas Miller Investment comments on the global outlook for emerging markets…

Several trends are currently affecting the emerging markets space.  For commodity biased economies, mining projects which started years ago are now coming on-stream adding supply into a market where demand is slowing.  This is driving a price fall which is likely to persist into 2015 as inventory is depleted and very slowly, capacity is squeezed out.  Pay attention to government revenues, particularly if they have been used for large scale infrastructure projects or domestic demand stimulation. 

Geo-political risk has risen through 2014. Most pertinent remains the Russia/Ukraine problems and the potential issues around energy supply into the region and further into Europe.  There remains risk that any disruption could adversely affect European recovery and therefore impact global demand and GDP.  

The long term case for investing in the emerging markets is predicated on a number of factors. The main one is demographic change and population growth. Add in structural reform and over time it seems clear that emerging economies will increase their share of global GDP significantly.

Countries where government takes structural reform seriously should benefit while commodity focused, unreformed countries will continue to carry disproportionate risks.  If you are looking at indices, be aware that the MSCI Emerging Markets index is nearly 20% China and over 15% South Korea and the top ten holdings represent 16% of the index with Samsung Electronics the largest constituent at over 3%.  You may wish to focus your investment more closely either through individual country indices if you want to go passive or by finding a third party manager whose exposure meets more of your own world view.

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