Investors ‘turn to emerging markets’

Frankfurt – Investors are pouring money into emerging market assets and a big trend ‘out of the West, into the rest’ has begun, according to Investec Asset Management strategist Michael Power.

But not all emerging markets were winners, so it was important to diversify portfolios beyond the asset allocation rigidity imposed by index tracking, Power said on Wednesday.
Investec Asset Management, part of JSE- and London-listed investment bank Investec Group, has about US$50 billion (N$425 billion) worth of assets under management, of which about half are in Africa.
For investors, ’emerging markets are no longer an optional add-on’, Power said.
‘The question now is no longer whether to invest in emerging markets, but how much,’ he added, noting that the market value of emerging country stocks was now 20 per cent of the global equity market capitalisation, up from four per cent in 2002.
Emerging market equity funds saw net inflows of US$3,2 billion in the first quarter of this year, compared with net outflows of US$58,8 billion from developed market equity funds, he said.
‘Investors are definitely re-engaging; the inflows are noticeable. It is becoming a big flow. ‘Out of the West, into the rest’, it is starting to happen.’
The Morgan Stanley Capital International (MSCI) emerging markets stock index has risen 61,1 per cent since last October, having fallen 63,9 per cent in the prior year after authorities in China took steps in the fourth quarter of 2007 to prevent the economy overheating.
The MSCI world index has gained 8,8 per cent since last October, having fallen 49 per cent in the previous 12 months.
Power said the recent emerging market performance showed that many investors were realising that last year’s across-the-board selloff of risky assets such as equities had been exaggerated.
With panic, and liquidity in the form of cash holdings at all costs, no longer dominating the financial markets’ mood, serious investors such as pension funds and foundations were again paying attention to longer-term trends.
‘On a 10-year horizon, you have to put Asia front and centre in an investment strategy,’ Power said. ‘By 2020, emerging markets will be bigger than developed markets,’ he added, referring to the value of gross domestic product.
Investec Asset Management thinks in terms of three emerging market categories: locomotives, coal trucks and passenger cars.
The locomotives, driving growth, are China and India, as well as the US and EU, although the latter are now out of steam.
The coal trucks are raw material supplier countries such as Brazil and some other South American nations, as well as Russia, Middle East oil exporters and parts of Africa. The passenger cars are eastern Europe, Turkey and Mexico.
‘You have to be hitched to the right locomotive,’ Power said, pointing to strong demand for commodities from China and India.
‘The coal trucks are hitched to the right locomotives, but the passenger cars are hitched to the wrong locomotives,’ he added, citing the close trade ties of eastern Europe and Turkey with western Europe and Mexico with North America. -Nampa-Reuters