Emerging Markets: Now More Stable Than Developed Ones
Investing in emerging markets used to be akin to riding a roller coaster. No longer, judging by new metrics from investments in those regions. I previewed some of Tabb Group’s recent
emerging markets research, and with their permission, am sharing a few nuggets…
Faster Recovery / Stronger Growth
Emerging markets are growing more reliably and recovering more quickly than developed economies. Consequently, they have enjoyed a lasting boom among investors that does not seem to be weakening. Since 2006, the compound annual growth rate for emerging economies has been 13%, well above the 4% benchmark set by developed markets. In 2010, emerging markets grew GDP at a 17% clip, well outpacing other regions that sought economic recovery.
Emerging Economies Outpace Developed World
Unquestionably, emerging markets have now earned a reputation as the most reliable way to achieve alpha. From December 2008 until April of this year, the equity market performance of emerging economies far outpaced developed economies. This explains why investors have been favoring the BRICs of the world quite blatantly. Historically, emerging markets have been tightly correlated with developed markets. However, since early 2009, the equity fund flow to emerging markets has drastically decoupled from that of developed economies. The IMF predicts that by 2015, one-third of the top world economies will be today’s emerging markets.
So the inflows are there, as are the returns. This reflects either strong fundamentals or great confidence in those markets among institutional investors. Unlike the bad products that have made the front pages, strong demand for institutional offerings that target emerging markets is not just a matter of Wall Street doing an exceptional job of marketing its own creations. Now it’s based on strong market fundamentals.
Emerging Markets vs. Frontier Markets
There are no exact criteria for defining emerging vs. frontier markets. In general, frontier markets are still dangerously unpredictable. But, increasingly, emerging markets offer steady performance, in some cases, in spite of political uncertainty and regulatory challenges. The relative inaction of the 112th Congress in the U.S. highlights that developed markets are not immune to damages borne from inept policy-making. In fact, the bullish state of emerging markets can be read another way: as a significant, no-nonsense threat to developed markets.
Challenges in Accessing these Markets
More generally, the primary challenge for investors that desire access to emerging markets is doing so quickly. Gaining access to a new fund in India, for instance, can take six months. China can take multiple years.
Institutions have enhanced their product offerings in several different ways to accommodate emerging market growth.
- Bulge bracket global banks emphasize their on-the-ground presence in nearly every major global market as a differentiator. This brings with it local knowledge of how the markets operate (beyond simple regulatory documents) and often the ability to trade in the local market as a local.
- For those just out of the bulge bracket, the offering of tailored products for a client’s investment needs at a low cost can attract significant business.
Increasing Demand
European and North American sell side firms are encountering continuing demand for emerging market exposure and access from their buyside clients. We expect that demand to continue for several years, as the developed world continues to struggle with complex economic and political issues while emerging markets continue to experience explosive growth in their middle class and domestic consumer base. Providing access to these markets creates a unique opportunity for sell side banks, brokerages, and financial technology providers to differentiate, create specialized offerings, and grow their client bases.