The 2014 CREATE-Research annual survey report, Not All Emerging Markets Are Created Equal, has been launched world-wide today and introduced with an article in the Financial Times. The sixth annual report is an independent survey commissioned by Principal Global Investors and its parent company, Principal Financial Group®.
The report findings are based on a survey sample of 704 pension plans, sovereign wealth funds, pension consultants, asset managers and fund distributors in 30 countries, the survey reached four conclusions.
1. Emerging and developed economies will continue to converge
Long a core feature of the globalisation of the world economy, convergence between East and West will deepen and broaden in two key spheres over the rest of this decade.
The first feature covers structural aspects such as regulatory framework for financial markets, industrial base, and asset class correlation. The second sphere covers investment approaches such as risk management, asset allocation and portfolio construction. However, there will be a slower convergence in intuitive aspects of investing such as investment beliefs, gut instincts and buy-and-hold mentality.
2. The emerging market story is being re-written as investors become more discerning
In the 1990s, investors under-estimated the weaknesses of emerging economies. In the 2000s, they over-estimated their strengths. So, it’s time for a rethink. Having waxed and waned between these extremes, ‘wait and see’ appears to be the dominant investor sentiment and opportunism the dominant choice – for now.
First, the proportion of respondents who believed in the emerging market growth story has declined from 61% to 41% over the past years.
Second, this shift is duly reflected in their asset allocation over the same period. The percentage of respondents who see emerging markets as an opportunistic play has increased from 30% to 48% for equities and from 15% to 51% for bonds.
3. The gravitational pull in key asset classes guide investors West
The growth dynamics of emerging economies look less rosy than at any time in the past 10 years. Growth will slow down. The taper program of the Federal Reserve may unsettle their markets – yet again.
On the other hand, investor sentiment remains vey positive towards the developed economies. It rests on the belief that the economic recovery and rising stock markets are now anchored in improving economic fundamentals; not just “sugar highs” from the Fed.
Over the next three years, the U.S. recovery will not only drive the locomotive of the global economy, it will also deliver the best returns amongst all the key regions.
4. This could be the age of stock pickers as catchy acronyms become irrelevant
Emerging economies are now embarked on a program of reforms in order to reboot their growth engines. The pace and content of reforms will vary markedly.
In the transitional phase, emerging nations will not move in lock step, as they have done in the past under the toxic influence of cheap money from the West. Those with double deficits – trade and budget – will remain especially vulnerable to violent outflows.
Hence emerging economies will no longer be regional groups that can be described by catchy acronyms like BRICS (Brazil, Russia, India, China and South Africa) and MINT (Mexico, Indonesia, Nigeria and Turkey). They will have as much that divides them as unites them; with just as many value traps as value opportunities. The gap between the best and the worst performers will widen.
The report concludes that stock picking will be the main source of alpha. Selectivity is vital due to growing dispersions in valuations of stocks, bonds and convertibles. Investors will be far more discerning about countries and avenues when investing in emerging markets, as variable geometry characterise their growth pattern.
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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