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Investors must explore the New Silk Road

By MICHAEL PREISS

22 August, 2011

Emerging economies are increasingly becoming the centre of economic activity in this decade

What is risky and what is safe? Many investors increasingly ask themselves this question in 2010. The sub-prime and global credit crisis has turned a lot of conventional wisdom up-side down and forced many to re-think their portfolio strategy and asset allocation.

One of the ironies of the professional investment business is that the concept of "liquidity" is often grossly misunderstood by many bankers and clients alike. It is often because of low liquidity that the best opportunities exist to begin with.

Traditionally, the best investment theme is one that is overlooked and under-researched, somehow illiquid and often considered boring or insignificant by many. In additioin, the most profitable investments for clients hardly have any LTV (loan-to-value ratio).

This was the case for most emerging markets in the last decade. In this decade, however, emerging markets have come of age and a lot of investors relised that one cannot afford not to have a large part of one's wealth invested in the growth markets of the future. When it comes to emerging markets investing, being too conservative often is the biggest risk.

Illiquidity often is a risk in emerging markets that, however, tends to be "smoothed" out over longer periods of time. Not being invested is a bigger risk than medium volatility.

What a difference a decade can make. Ten years ago, many emerging markets were considered too small, too illiquid and insignificant to warrnant a place in investor porfolios.In 2010, however, many realise that the real opportunities and best risk/adjusted returns are to be found in the emerging markets and frontier markets of the worlds.

The current global monetary and low interest rate environment is very favourable for commodities are reflationary policies in the West cause capital flows to emerging markets, which in turn lead to higher growth and demand in the emerging markets.

Investors in bluechip banks such as Royal Bank of Scotland Citibank lost a fortune in these previously perceived safe investments. Citibank at one time was one of the world's safest banks and last year its stock traded at US$1, down from US$55 the year before, and it cut all dividends.

Commercial Bank of Kenya, on the other hand, often considered too risky by many investors, still pays steady dividends and its share price rose steadily when most western banks "almost" went bankrupt and were bailed out by western governments and central banks. Investors in shares of Standard Chartered Bank made substantially more money in its local African listing of Ghana and Kenya compared to its listings in London and Hong Kong. Counter-intuitive but true.

During the last decade, I spent a lot of time travelling to emerging economies. One has to wonder whether the "official" economic statistics fully pick up what is happening on the ground. The pace and scale of change, and the catch-up potential across many countries, is phenomenal and not always fully "priced in" in securities valuations.

Emirates became a leading airline by conecting the dots between previously unimportant parts of the world. Many emerging markets increasingly invest in and trade with others which offer new opportunities.

Many emerging markets are able to leap-frog into the most advanced technology without going through the various stages of development that older western markets experienced.

Now, the engines of development are not only centred in the developed markets such as the United States, Europe and Japan, but are being found in many of the emerging nations which are multiplying their resources by investing in other emerging markets.

The rich western countries are becoming comparatively poorer and the previously poor emerging market countries are becoming relatively richer and this changes everything.

Many analysts and strategists proclaim a New World Order in which BRIC and emerging markets are becoming increasingly the centre of economic activity and cross-border capital flows. Some call it the New Silk Road, connecting Africa, The Middle East and Asia.

It also has substantial implications for your wealth and portfolio composition in this new decade, a trend that many investors overlook at their peril. In the words of a Chinese proverb:" Fortune favours the brave and the prepared mind."

The writer is an investment adviser and

finance professor and can be reached at:

[email protected]