Emerging Markets Sub-Prime Safe Havens

By James Gonzalez, Market Analyst

With the stock markets taking yet another heavy blow this month, can we be sure that the sector is lucrative enough to make any money at all this year? Is it just sub-prime fuelling the withdrawal of investment funds or are investors taking their money elsewhere?

The latest downturn came after news that the US Investment Bank, Bear Sterns, required emergency funding from the Federal Reserve to cope with its vast debt. JP Morgan Chase strategically moved in and bought out the bank at a fraction of its original value. To further calm investors’ nerves, and of course sweeten the deal, the Fed stepped in to take over $30 billion worth of the bank’s assets, therefore reducing the financial risk to JP Morgan.

The FTSE 100 share index took one of the biggest knocks ending 3.9% down on the back of the Bear Stern news, fearing that the credit crunch had reared its ugly head yet again.

With this long-winded, drawn out uncertainty comes a deep seeded lack of confidence in the markets, and as players are repeatedly burnt it is only a matter of time for them to call it a day and hang up the mobile, close the laptop and say goodbye to their long-term friendship with the Bloomberg ticker.

So where are investors resting their laurels? The price of gold has certainly increased sharply, which may provide investors with some much-needed breathing space. However, hand-in-hand with price increases comes a decrease in demand as jewellery manufactures lean towards recycling old stock as opposed to buying new, high priced material.

Over the long term, research shows that gold does not perform as well as the stock markets. Therefore, with the yo-yo markets and a drop in gold imports, what is left for the investor to lay low and wait for the storm to blow over?

But there is another option – Property - why? For the same reasons why I got into the business all those years ago and why I remain within the sector. Property, I can safely say is my investment option of choice and also how many millionaires got to where they are today.

Over the last 50 years, property has beaten the FTSE in terms of providing consistently stable profits. Within this same period, property’s worst performing five-year cycle still grew by 16%, whereas stocks showed a huge deficit of -22%.

The fact is property prices may fluctuate somewhat, there maybe price corrections to ensure a stable secondary market, but the truth is the bottom will not fall out of the property markets.

Firstly, governments across the globe have enough practical understanding to ensure that property prices remain buoyant and will therefore adjust inflation levels and interest rates accordingly. And secondly, people will always need somewhere to live or play. Therefore, there will always be a buyer and there will always be a seller - whatever the conditions may be.

Emerging markets not only offer the best overall returns, particularly if investors enter the market early, but they are also shielded heavily from the nightmare of cross border lending that has affected our lives and local investment markets.

For example, last year Bulgarian property realised a 34% property price growth with a projected 15% to 20% for 2008. Investment is in fact pouring into the country. Infrastructure funding from both private and public funding is opening up new areas, and commercial development is springing up around the country’s cities following the influx of large blue chip companies relocating to take advantage of lower operational costs.

Plans for eight new shopping malls are to be unveiled this year alone, a major €64 million business park is to be developed near Plodiv and several US companies, including BPO specialist Sutherland Global Services will spend over €12 million on a relocation plan. Airports across the country have also confirmed an 11% combined increase in traffic.

Brazil is widely viewed by international investors as a safe haven from the sub-prime mortgage world. Since 2002, the world financial markets were convinced that Brazil was to follow Argentina down the road to default. However, the global financial markets are now in complete awe of the economic stability, which has rolled into the Brazilian housing market. Obelisk client, Alan Roberts, purchased off plan in Brazil in 2007 and said recently, "I considered going into buy-to-let in this country (UK), but was concerned about continued good returns. I think the recent sub-prime crisis shows that my fears were well-founded."

The discovery of oil reserves in the country ensures that Brazil can in fact stand on its own two feet and the MSCI's emerging-markets index has now rated the Brazilian stock market at the number one spot.

It is certainly no wonder why investors are turning to more lucrative property investments. As long as you research the areas you are interested in by checking the financials, legalities, political stability etc. or alternatively source a company who is able to do all this for you. As Obelisk client Ian Lane says, "Obelisk do everything for you. I just basically invest my money and they put it in the best place and give me the best returns. It takes all the hard work out of investing abroad.”