By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-Investors are beginning to closely scrutinize emerging markets before making investment decisions in those areas as they perceive them as no longer a homogenous group.
This is contained in a report ‘’Not All Emerging Markets Are Created Equal’’ published Monday by CREATE- Research and Principal Global Investors which said after investors have suffered losses following recent emerging market volatility, they now scrutinize individual countries before making decisions.
The survey said countries are developing at different speeds and those identified as embracing a reform agenda are recognised as being more attractive.
According to the survey, these economies are expected to converge structurally and financially with developed economies in the near-term. ‘’Nearly 35% of survey respondents believe China will deliver strong returns over the next three years, while only 15% believe Brazil can do so. Similarly, over 50% of respondents believe China will make significant progress in implementing necessary economic reforms, whereas only 6% believe that Russia can do so,’’ the survey said.
The survey affirmed that those investors viewing emerging market assets as an opportunistic play has increased from 30% to 48% for equities, and 15% to 51% for bonds, since 2012.
It said investors have now changed the landscape of emerging markets investing and emerging markets being increasingly considered as a tactical rather than a buy-and-hold investment.
Amin Rajan, chief executive officer (CEO) at CREATE-Research and the author of the report said “While emerging markets in the East continue to converge with developed markets in the West, it is clear from our research that emerging economies will no longer move in lock step. This could be the age of stock-pickers, as catchy acronyms such as BRICS become irrelevant.”
The report’s findings based on a survey of more than 700 pension plans, sovereign wealth funds, pension consultants, asset managers and fund distributors across 30 countries with a combined AuM of US [$29.7 trillion] discussed the extent to which emerging economies and developed markets will converge or diverge over the rest of this decade.
Rajan said it seeks to understand how emerging economies resemble their developed peers, in terms of economic well-being and investment approaches and analyses what factors are likely to affect convergence.
Key findings in the survey shows that emerging and developed economies’ market structures will continue to converge over this decade.
56% of the respondents expect further convergence between East and West in terms of market structure. While 32% expects further convergence in investment behaviours, with nearly 60% expecting no change in this area.
Other key findings in the survey are country-specific risks gaining importance over macro risks, giving way to the rising significance of stock-picking, investors questioning the emerging market story, with those who believe in emerging markets dropping from 38% to 20% since 2012.
The report further affirmed that China is leading the way in the East with more than 50% of investors positive about the country’s economic outlook in the near-term.
However, the report said the United States (US) is regarded by investors as the key driver of the global economy over the next three (3) years and 47% of investors believe the US recovery will deliver the best returns.
‘’Nearly 65% of investors believe the US government will make significant progress in rebooting its economy over the next three years, while 30% of investors think the outlook for Europe remains decidedly cloudy, with isolated pockets of revival expected only in Scandinavia and the UK,’’ Rajan affirmed.
On his part, Nick Lyster European CEO of Principal Global Investors Europe said “The study indicates there is no longer a blanket acceptance of the emerging market story. Investors’ return expectations have dropped markedly for equities and bonds. The gravitational pull in key asset classes guide investors West over the next three years.”
Lyster said even so, emerging market equities are looking cheaper on a relative valuation, though investors will likely need to be patient to benefit. ‘’Investors with a long-term perspective still need to consider a significant strategic allocation to these markets. Developing markets by their very nature will continue to progress; they will just do so at divergent speeds. Guidance from high conviction specialist managers to identify opportunities will be necessary,” he said.
