Johannesburg - Emerging markets may have become investors' darlings, but backers should remain aware of the risks involved.
Over the last decade, the growth prospects of countries such as Brazil, Russia, India and China have made them popular choices with asset managers. South Africa itself has seen net investment inflows of R75bn in 2009.
However, Adrian Clayton of Alphen Asset Management said backers should not just take it for granted that investments in emerging economies will give good returns.
He said: "It concerns us that most emerging markets have not adjusted their economies adequately to deal with the new world."
Referring to economic conditions in the wake of 2008's market meltdowns, Clayton said: "The new world is low and slow, and export-orientated countries will be facing a diminishing external market." A major challenge facing such economies is that their currencies have appreciated heavily over the past year, making them uncompetitive.
In the case of South Africa, for instance, exports from the mining sector have been hampered by the strong performance of the rand against the dollar. The rand was one of the best-performing currencies against the dollar in 2009.
Investec economist Annabel Bishop said the local economy will be "heavily dependent" on the resurgence of global demand.
Optimism over India and China
She said the prospects of rising interest rates and Eskom's proposed electricity tariff increases would further delay South Africa's economic recovery. Bishop forecasts gross domestic product of 2.5% in 2010, and 3.7% in 2011.
Despite uncertainties about exports, analysts at investment firm Ashburton are upbeat about the prospects of some emerging markets, specifically China and India.
Asian equity specialist Jonathan Schiessl said: "Although the Indian equity market was severely sold off during the crisis, the actual economy barely blinked."
He expected further growth in corporate earnings and increased capital expenditure to drive these economies, although a dollar rally may stifle this.
"A rally in the dollar may precipitate gyrations across financial markets - especially in commodities and emerging markets, although we would expect weakness to be temporary," said Ashburton's manager of asset allocation and strategy, Tristan Hanson.
- Fin24.com