Last updated: 21:07 / Sunday, 22 June 2014
CREATE-Research/ The Principal

Emerging Markets Enter a New Investment Reality

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Emerging Markets Enter a New Investment Reality
  • Survey from CREATE-Research and The Principal offers insights on emerging markets investing
  • “Emerging markets are no longer seen as a homogenous group"
  • Those identified as embracing a reform agenda are recognized as being more attractive
  • 35 percent of survey respondents believe China will deliver strong returns over the next three years, while only 15 percent believe Brazil can do so

Investors have become more discerning about investing in emerging markets as their economies reform at varying speeds, according to findings from the annual independent survey released by CREATE-Research and commissioned by the Principal Financial Group® and Principal Global Investors.

“Emerging markets are no longer seen as a homogenous group. Different countries are developing at different speeds,” said Barb McKenzie, chief operating officer of Principal Global Investors. “Those identified as embracing a reform agenda are recognized as being more attractive. Survey respondents expect these economies to converge structurally and financially with developed economies in the near-term.”

Nearly 35 percent of survey respondents believe China will deliver strong returns over the next three years, while only 15 percent believe Brazil can do so. Similarly, more than 50 percent of respondents believe China will make significant progress in implementing necessary economic reforms, whereas only 6 percent believe Russia can do so.

The report, Not All Emerging Markets Are Created Equal, explores the extent to which emerging economies and developed markets will converge or diverge over the rest of this decade. It seeks to uncover how emerging economies resemble their developed peers in terms of economic well-being and investment approaches, and analyzes factors that are likely to affect convergence.

The findings are based on a survey of more than 700 pension plans, sovereign wealth funds, pension consultants, asset managers and fund distributors across 30 countries with combined assets under management of $29.7 trillion. The survey was followed by 110 interviews.

From buy-and-hold to tactical

Marked volatility in emerging markets has caused investors to become more discerning, changing the landscape of emerging markets investing to be considered tactical rather than buy-and-hold. According to the survey, those investors viewing emerging market assets as an opportunistic play has increased from 30 percent to 48 percent for equities, and from 15 percent to 51 percent for bonds, since 2012.

“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,” said Prof. Amin Rajan, CEO of CREATE-Research and author of the report. “This could be the age of stock-pickers, as catchy acronyms such as BRICS become irrelevant.”

United States drives global economy

Survey respondents view the United States as the key driver of the global economy over the next three years:

  • Forty-seven percent of investors believe the U.S. recovery will deliver the best returns
  • Nearly 65 percent of investors believe the U.S. government will make significant progress in rebooting its economy
  • Thirty percent of investors think the outlook for Europe remains decidedly cloudy, with isolated pockets of revival expected only in Scandinavia and the United Kingdom

Key findings by investor segment

Themes emerging from the survey relative to each investor segment include:

  • Defined benefit plans: aging member demographics are driving the transition from asset accumulation to liability matching, with opportunistic investors looking toward distressed debt, emerging marketing equities, ETFs and emerging market corporate bonds
  • Defined contribution plans: inadequate plan balances are intensifying the search for higher returns with the most opportunity seen in ETFs and active equities and bonds
  • Retail investors: becoming ultra-cautious as they approach or reach retirement with a focus on cost, convenience and capital preservation when choosing investment products
  • High-net-worth investors: pursuing a range of goals including inflation protection and regular income via real assets and low volatility via balanced and capital protection funds

“The research clearly shows a change in the landscape of emerging markets investing as investors become more discerning,” said Julia Lawler, senior vice president at The Principal®. “The demographics of aging populations with an eye toward retirement coupled with investors interested in a buy-and-hold approach are leading a fundamental change in asset allocation decisions.”

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