The US loss is the emerging markets’ gain
Enthusiasm for emerging market assets has scarcely dimmed among fund managers: emerging markets continue to outperform their peers in the developed world, signalling that many investors, far from calling for a shedding of risk, are increasing their exposure to the asset class.
In the past, a financial market crisis was the signal to shed risk of any kind, including emerging market assets. But this time, risk is coming not from the fast-growing emerging world but from the world’s most developed country – the US and its banking system. Brazil, China and Russia are continuing to churn out iron ore, gas, oil and plastic goods, with GDP growth rates of more than 7% in the latter two.
Russia posted economic growth of 7.8% in 2007 and is predicted to hit 7.5% this year while China’s growth may fall to around 9% in 2008 from 11.4% the year before.
Jerome Booth, head of research at Ashmore Investment Management, is calling for pension funds to place 35% of their portfolios into emerging markets. “Globally, the big money is in the pension funds and central banks – they’re long investors and they’re undoubtedly underweight emerging markets,” says Booth.
“Emerging markets will be 50% of the global market in 15 years’ time, so there is a huge technical reason to buy their assets. Pension funds need to be putting 35% of their portfolios into emerging markets today.”
Emanuele Ravano, co-head of European strategy at Pimco, agrees. “We are telling our clients they should put at least 10% of their assets in emerging markets as an average,” he says.
Leveraged investors, that is, hedge funds, have largely disappeared from the public emerging markets. But where they are apparent is in private placements, where lowly rated or unrated borrowers – unable to access the loan market and unwilling to pay the sorts of premiums being demanded in the public bond market – are placing deals privately. Eye-watering coupons and equity kickers are the norm.
Structural shift
Emerging market bulls believe a spectacular reversal is about to happen. Over the past five years market participants have become used to emerging markets being net exporters of capital, thanks to their export earnings and high savings rates.
But Booth believes this is an anomaly, which will reverse – indeed, may be reversed by the credit crunch. “There are people in the markets saying ‘sell EM’ but also there are people in EM saying ‘sell the US – we thought this stuff was safe!’” Booth says. “There is a structural shift reversing the export of savings out of the emerging markets, towards people putting more assets into emerging markets. A lot of this money is coming home.”
It’s a phenomenon not lost on the big US and European investment banks. Emerging markets offer the best opportunities in wealth management, according to Merrill Lynch’s CEO, John Thain.
“The best opportunities are outside the US. “There is a tremendous amount of new wealth being created, whether it is in India, China, Russia, or Brazil or the Middle East. All of those parts of the world, we can compete in terms of managing financial assets for wealth individuals as well as for entities.”
Wealth management has largely escaped fallout from the credit crisis, and it is in this area that many banks are now focusing. —J.O.