Emerging Markets at an Inflection Point

The sixth annual asset management survey report from CREATE-Research and The Principal®, titled Not All Emerging Markets Are Created Equal, will be introduced world-wide on June 16, 2014 in the London Financial Times, and The Principal’s® Website.

The report explores whether emerging economies are yesterday’s story or if they are merely rebooting their growth engines before the next leap. Emerging markets’ stellar growth in the last decade has no parallel. Not only did the markets deliver outsized returns on bonds and equities, the growth also sparked rapid convergence with developed markets. Most of emerging markets’ growth went into overdrive on the back of a super cycle fuelled by double-digit growth in China and a credit explosion in the U.S.

However, in this decade, they have switched into lower gear. Their asset values have taken big hits: the last one from a massive flight of foreign capital, when the U.S. Federal Reserve first decided to taper its monthly bond purchases last year.

The scale and speed of the resulting sell-offs in emerging economies have raised doubts about whether their convergence with the West will continue; and whether their financial markets have lost their star appeal.

The associated risks can no longer be priced in at today’s low market valuations. Most emerging markets are seeking fresh differentiation via reforms. For example, China has grown too rich to sustain its stellar growth on low cost manufacturing. Its annual wage inflation of 14% over the last decade has blunted its competitive edge.

The winds of change are evident. But the pace and intensity of reforms will vary markedly. Hence, these markets are unlikely to move in lock step, as they have done in the past. Besides, the global economy is marred by extreme uncertainty.

The worst of the post-Lehman crisis is over. But it is not in the rear-view mirror yet.

The U.S. economy is on the mend. Europe is breathing a sigh of relief. Japan has kick-started its own economy. Their stock markets have hit fresh highs. Confidence is reviving. But big doubts persist on four mega market-moving unknowns:

  • The Fed’s exit strategy
  • Slow deleveraging in Europe
  • The ‘three-arrows’ initiative in Japan
  • The credit explosion in China.

The outcomes of each may be poles apart: either booming markets at one end or periodic volatility spikes at the other. Investors have no precedents to guide them.

Against this backdrop, this valuable report assesses the market outlook in the East and the West and highlights the implications for asset allocation over the next three years. It goes on to examine the asset classes which will fare well while these macro-level unknowns impact global financial markets. It also unearths the regional nuances around them.

We encourage you to read the full report, available at create.principalglobal.com, on June 16, 2014.



The information in this article has been derived from sources believed to be accurate as of June 2014. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity.

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