This relationship is not surprising, as a stronger economic backdrop provides a powerful tailwind for businesses operating in those geographies.

“In terms of performance, Colombia, Russia, the Czech Republic, Indonesia and Peru were well out in front, followed by a string of other emerging markets, after which the developed economies began to appear,” said Tom Stevenson, Investment Director at Fidelity Worldwide Investment.

“Only Australia got close and that’s because it has benefited from the massive demand for resources from Asia’s growing economies – it’s been a developing market play.”

While the analysis is based on the past 10 years, Mr Stevenson is confident about the future prospects for the emerging markets for two main reasons:

1. The ability to fund economic growth across the developing economies is far less constrained than in the developed world.
2. Emerging markets offer attractive valuations for superior levels of profitability and better growth prospects.

“As inflation concerns moderate in the developing world, public, private and domestic participants are in a much stronger position to fuel economic growth,” says Mr Stevenson.

Sovereign, private sector and household debt levels in emerging economies are generally much lower than those of the developed economies, thereby providing greater scope to fund growth.

Fidelity believes that emerging market countries will be responsible for the bulk of global GDP growth over the next couple of years. “We estimate that emerging markets accounted for about 80% of global real GDP growth in 2011, up from 73% in 2010,” says Mr Stevenson. “We expect this share to stay at around 80% in 2012.”

However, Fidelity adds a note of caution. On average, 11% of emerging markets’ GDP is exported to the main developed regions of the US, eurozone, UK and Japan. Should growth remain depressed in any of the main areas of the developed world, exporters will suffer. Exporting countries that are more vulnerable to an economic downturn in developed countries are those in the former Eastern Europe, such as the Czech Republic and Hungary, which rely on trade with developed territories such as the eurozone for approximately 50% of their GDP.

Countries whose economies are less reliant on exports and which are therefore more insulated the vagaries of the developed economies include Brazil, Taiwan and India, with only around 5% of their GDP dependent on exports to the developed world.

Mr Stevenson notes that the developing consumer markets in countries like these along with, in many cases, an abundance of the resources that stand to benefit from both rising structural demand and any shorter term price inflation effects offer a cushion in the event of an economic downturn elsewhere, and better prospects for growth in the future.

“Obviously, other country-specific factors play an important role, but a strong domestic economy seems to have a positive effect on market sentiment and return,” says Mr Stevenson. “And emerging economies still stand to grow faster than most of the developed world for the foreseeable future.”

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs.  You should consider these matters before acting on the information.  You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product.  The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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