Nations with a fast-growing GDP are extremely attractive to foreign investors. Quite apart from the undoubted benefits of diversifying an investment portfolio internationally, the prospect of a newly wealthy population eager to compound their economy through plentiful conspicuous consumption seems too good an opportunity to miss. However, recent research indicates that potential investors should proceed with caution in this kind of market, and look to lower GDP emerging markets for sound returns on their investments. Findings by the newly financially-cautious London School of Business have brought to light surprising figures regarding lower GDP economies which could turn the drive to invest in growth economies on its head. The lesson overall appears to be that?taking sound advice and employing the right asset managers?for the region is the best way forward, but the regions providing the greatest returns were, surprisingly, those with a far lower GDP growth than many would expect.

Study into Emerging Markets

In the UK, financial advisors are increasingly advocating treating the market with careful scrutiny before committing to an investment. Financial advice sites warn potential investors that the markets need to be thoroughly weighed before a decision should be made, preferably using advice from companies like Miltrust. ?Get it wrong?,? warn their readership, ?and you could end up losing your capital?. This makes emerging markets a tricky prospect. As the Telegraph?s Tom Stevenson points out,??Many of the rules of thumb about investment strategies are?really a reflection of what has worked and not worked in developed markets such as the US and Britain?. What has gone down well in western markets, in other words, may not have quite the same effect in developing markets. With this in mind, professors from the London Business School have compiled a set of data reporting on emerging markets in order to try and pin down a few global mores which can be applied to emerging market investment. What they found is in many ways quite surprising.

Low GDP, Higher Profit Margins

One interesting piece of information to come out of the London Business School report on emerging markets was that countries with low GDP growth appear to give higher investment returns than those with greater or faster GDP growth. The difference is significant. The lowest growth-rate nations provided an average return of 28pc annually over a thirty year period, while their higher-growth neighbours gave only 14pc. This at first glance seems highly counterintuitive ? especially as investment drives up until now have tended to focus upon the great potential of high-growth markets in comparison with the ?stagnating? West – but it is perhaps not as surprising as you may think. Countries with low growth are often considered higher risk, meaning that investors want to ensure that it will be really worth their while before investing in them. As such, investments are made with great care, after taking advice on the subject, and tend to be substantial enough to ensure a positive return. When the relative cheapness of low-growth economy investments is factored in, this invariably results in much higher returns than would be obtained from a more carefree investment in a growth economy. It is further to be noted that lower growing economies experience little investment in companies financed from the equity market, meaning less financial dilution within the trading pool.

The Benefits of a Growing Population

There are other factors influencing the low GDP/high investment return relationship as well ? not least of which is the Demographic-Economic paradox. This paradox dictates that, statistically, a country?s population tends to expand in inverse proportion to its GDP. Essentially, it means that low GDP nations tend to have a lot more people, and a growing population. This is in stark contrast to more developed nations, in which populations tend to be declining.?This decline has led to?concerns?about the viability of the Western economy. More people generally means more workers, more consumers, more investors, and more human resources. A growing population means more young people to lend some vitality to the investment economy, and countries with high populations have greater economies of scale. There is of course the argument that a large population overburdens the national finances by requiring government investment in infrastructure, healthcare, schooling and so on. Furthermore, it cannot be denied that a low income per capita not only reduces access to the kind of education which will provide the economy with skilled workers, it also limits the opportunities for private consumption and spending. However,?most free market economists?agree?that the benefits of a growing population for foreign investors far outweigh its deficits.

Risk of Fast-Growth Economies

Another factor which contributes to the findings regarding low GDP and high investment returns is the situation in which nations with fast-growing GDPs frequently find themselves. Not least among these is the risk of hyperinflation. When a national economy shoots up very quickly, it can easily exceed itself and find itself within difficulties. Many developing nations lack the financial infrastructure to cope with sudden economic growth, and find themselves in a situation where there is far too much money and too few goods, investors, or resources to process it. As a consequence, the currency becomes devalued and hyperinflation results as the government and banks desperately try to rectify the situation. It does not help that large corporations can quickly gain an unhealthy degree of control in such economies, and many give in to the temptation to raise capital simply because they can. This results in the overworking of assets and the stretching of an economy past capacity which can also lead to hyperinflation and a decidedly insecure financial situation (despite appearances often being to the contrary). This swiftly brings about a lack of trust on the part of the people for the economy, which leads to a decrease in financial consumption and thus an extremely negative effect upon profit margins for investors. Furthermore, it leads to currency instability. A stable currency is perhaps one of the greatest requirements for any investor in foreign markets. Inflation and hyperinflation have long been a?concern?for those investing in emerging markets, indicating a need for prudent and shrewd studying of the market before any investments are made.

Do Your Research

None of this is to say, however, that one should immediately invest one?s capital in low-GDP emerging markets. Factors like the size of the trading pool, the fiscal caution or otherwise of the population and government, the level of debt within the nation, and the exchange rate must all be factored in carefully before any decision is made. It should also be noted that many emerging markets lack the regulatory systems inherent in more developed markets, which increases the risk of fraud. Stock should also be picked with extreme care to avoid getting involved in the interests of unscrupulous companies who may be tempted to go on a capital drive when the situation neither warrants nor is appropriate for it. ?Then there is always the potential for political upheavals and government action which could destroy an otherwise promising investment. As such, it is clearly in the best interests of any institution to engage the services of Milltrust International to thoroughly learn the lie of the land and manage the investment effectively before embarking upon an enterprise in an emerging market.