Emerging Markets: a great money making opportunity too impressive to neglect…

The June 2011 edition of Institutional Investor magazine featured an article that highlighted the relevance of investing in emerging markets and I summarize the rationale as follows:

• The economies of the emerging markets are growing and their debt and fiscal positions are relatively better; and
• Institutional investors are underallocated to emerging markets and many are increasing their emerging market exposure

The combination of those two trends would be expected to drive up valuations, thereby driving investment returns but also increasing the risk of overpriced markets.  As a result, whereas investors may have historically played emerging markets for “beta” by investing in indices and large caps, the value of being more selective in these markets is likely to increase in importance.  We believe that investors should be increasing their investments in emerging markets but doing so selectively.
The following are some selected excerpts from the article:

• “Emerging and developing markets are expected to grow by 6.5 percent this year, nearly three times as fast as the 2.4 percent pace of the advanced economies, according to the International Monetary Fund.”
• Joyce Chang is global head of emerging-markets and credit research at JPMorgan Chase & Co. in New York.  “’EM countries continue to look better on the debt and fiscal front as developed market debt and fiscal positions have deteriorated over the last three years.” says Chang.
•  Timothy Moe, chief Asia-Pacific strategist of Goldman Sachs, forecasts that “Over the next 20 years…Although developed markets are likely to more than double in size, to $66 trillion, capitalization of the emerging markets should grow nearly sixfold, to $80 trillion.”
• “To be sure, the growth of emerging-markets investing does face challenges.  Some investors and analysts warn about the danger of lofty valuations, which in many countries exceed those in developed Western markets.”
• Yngve Slyngstad is CEO of Norges Bank Investment Management, the manager of Norway’s giant sovereign wealth fund.  “Slyngstad is looking to pursue diversification across a broader front.  Last month he went to the Ministry of Finance and requested authorization to substantially increase the emerging-markets allocation of the Government Pension Fund Global, as the sovereign fund is called, because of the growing size of  those countries in the global economy.  The fund has roughly $50 billion of its $555 billion in assets in emerging markets or in companies heavily involved in those markets.  Slyngstad wants to increase that figure by two thirds, to almost $85 billion, by the end of next year.” 
• “In addition to expanding the fund’s emerging equity allocation, Slyngstad wants to put more of that exposure in the hands of dedicated emerging-markets managers.  He believes most emerging markets are less efficient than their developed world counterparts, providing an opportunity for knowledgeable local managers to generate alpha.”
•  “As more institutions look to emulate active emerging-markets players like the Norwegian fund, the potential for further capital flows to these economies is great.”
•  “The University of Notre Dame, which has almost 16 percent of its $7 billion portfolio in emerging markets, is looking to increase that weighting, possibly doubling it in the next five to seven years, with private equity accounting for half of the growth.”
• Newlight Associates is a New York investment firm that specializes in emerging growth stocks.  “’Investors who neglected the emerging markets in 2009 missed one of the great moneymaking opportunities of the decade,’ says Newlight’s Raucci. "Those who continue to neglect the EM going forward do so at their peril.”

 
 *Source: 6Upta, Udayan. "Bric and Beyond". Institutional Investor. June 2011