Passport to danger

By THIS IS MONEY
Updated:

 

TECHNOLOGY investors may have had it tough in the past 18 months, but it could have been worse - they could have put their money into emerging markets.

During the early Nineties, gung-ho investment groups and financial advisers encouraged clients to plough cash into the markets of Asia, Eastern Europe and Latin America.

The hope was that the economies of these countries would grow far faster than those in the developed world, leading to sparkling returns.

But a series of financial catastrophes left investors nursing heavy losses. The problems started in late 1994 when Mexico's currency, the peso, was forced to devalue in what was dubbed the Tequila Crisis.

Less than three years later, investors were hit by a devaluation of the Thai baht, causing a big drop in emerging markets share prices.

This was followed by economic crisis in Russia in the summer of 1998 and devaluation of the Brazilian real in 1999. This year, Argentina's economy crashed into the rocks, causing more uncertainty - and losses - for investors.

Richard Hopkins of Henderson Global Investors says: 'Emerging markets seemed to promise big returns and for a very short time it looked as though they would deliver them. But in hindsight it was a classic investment bubble.'

The figures are sobering. Over the past five years, Argentina's stock market has dropped 38%, Thailand has lost 47% and the Philippines has plunged a massive 56%.

Adventurous savers who were unfortunate enough to have put money into emerging market funds concentrating on single countries have lost almost all their investment.

While there have been dramatic losses, other markets have made tremendous gains. Hungary's market has rocketed 50% over the past five years, while China has leapt 41%.

Yet even funds that invest globally in a spread of emerging markets have lost money over the past five years. So what are the prospects for investors?

Mark Dampier, director of independent financial adviser Hargreaves Lansdown in Bristol, says: 'We are now keen on emerging markets. They usually do well when global growth is strong, so if you believe there will be a recovery in America, they should gain ground. Also, they are totally out of favour, so share prices are still cheap.'

Despite their volatility, expert say it is worth having some money in emerging markets. Those prepared to take a chance should invest up to 5% of their portfolio and pick funds carefully.

Dampier says: 'I prefer the big global emerging markets funds run by well-established teams such as First State, Baillie Gifford and Gartmore'.

Bridget Quirke, 57, is hoping for a recovery in emerging markets. Like many people, she invested in this arena during the Nineties, putting £2,000 in Invesco's Hong Kong & China fund.

Bridget, an accounts manager from Windsor, says: 'Emerging markets have performed badly since I invested. But I knew I was in for a volatile ride. This is a long-term investment, so I will wait for a recovery.'

Most watched Money videos