Asset allocation is far more important for gains than stock picking
Published 19/08/2010 | 05:00
SHARESCOPE often gets letters and emails from readers who don't know where to put their money but this column takes care never to respond with any advice; we aim to inspire rather than direct.
A frequent question is whether to invest in the so-called BRIC countries (Brazil, Russia, India, and China) to spread risk and avoid holding too much exposure to Western countries, which remain reluctant to tackle their problems and face the prospect of defaults.
Thinking long and hard about where to invest makes a lot of sense as surveys repeatedly show that asset allocation is far more important than stock picking when it comes to investing.
While the BRIC states are attractive, readers of a very adventurous disposition might like to consider investing in Indonesia and Turkey, which are beating the BRICs and the rest of world's emerging markets by almost any measure.
Indonesia's equity index has climbed 21pc this year and Turkey's had risen 13pc by last week. The MSCI BRIC Index of shares in Brazil, Russia, India and China was down 1.2pc in the same period -- a similar decline to the ISEQ's.
Jim O'Neill, the man who coined the term BRIC, has placed Indonesia and Turkey at the top of his "Next 11" smaller emerging nations with the most potential to affect world growth.
O'Neill and other fund managers like the fact that profit growth is outpacing share prices in both countries, leaving the Jakarta Composite Index and ISE National 100 Index trading at price- earnings ratios 20pc below their peaks.
While the ratios are below their peaks, Indonesian stocks are becoming more expensive relative to other developing markets.
The Jakarta gauge trades at 13.5 times analysts' estimates for earnings over the next 12 months, near the highest on record relative to the MSCI Emerging Markets Index, which is valued at 11.2 times, according to data compiled by Bloomberg since 2006. The MSCI BRIC gauge has a ratio of 11.
The recent interest in Turkey and Indonesia follows very difficult periods for both countries during the credit crisis and continuing fears about the political situation in both of the Islamic democracies.
The IMF seems to believe that those days are over. It sees Indonesia's $540bn (€419bn) economy growing 6pc this year and Turkey's $617bn economy expand 6.25pc. Gross government debt is seen averaging 31pc of GDP in Indonesia this year while Turkey is seen hitting 50pc.
What to buy? Well the Armored Wolf hedge fund recommends Turkish shares, the foreign-currency bonds of Indonesian coal miners and Turkish banks including Istanbul-based Turkiye Garanti Bankasi, along with local-currency government debt of Indonesia due in five and 20 years.
Urquhart Stewart of Seven Investment Management recently tipped Turkey but only for "very sophisticated investors" because he likes the 10-year view.
He sees a rise in consumer spending and recommends the iShares MSCI Turkey ETF as a cost-efficient fund that will give a broad exposure to Turkey.
Those interested in Indonesia might want to consider the iShares MSCI Indonesia Investable Market Index Fund, which opened in May this year and invested directly in Indonesian financial, energy, and telecom companies, all of which make up 55pc of the new fund.
Those who are interested in a more general fund which includes Indonesia (with around 10pc) as well as the main BRIC countries such take a look at the Templeton Global Bond Fund.