First published: The Boeckh Investment Letter Volume 2.16, 25/10/2010
Is this the emerging markets (EM) century? Will China rule the world? Are debt- ridden Western economies with broken growth drivers and rapidly ageing societies on an irreversible path towards stagnation and decline? These penetrating issues are too weighty for the cut and thrust of an Asset Allocation committee’s regular investment meeting. But in the volatile and unpredictable post-crisis world—witness the eruption of U.S. trade law proposals, currency wars, U.S.-China political tensions, inward capital controls—they are the nuts and bolts of how the global economy and asset markets are going to behave in the next few years. I argue below that the consensus view about the future of emerging markets isn’t as robust as it believes, and investors need to be especially careful.
Looks Simple Enough
If you buy into the view that EM are the future, and that the biggest will shed their ‘emerging’ status in the next 10-15 years, asset allocation should be a no-brainer. The historical returns on EM equities are compelling, rising by over 12% per annum over the last 5 years, and half as much again in the case of the BRICs. In 2010, the EM story has shifted to bonds. Equities are up only 3.3% on average, while the Citi EM Sovereign Bond Index has gone up by over 12.5% so far this year. Commodities and resources, of course, have continued to benefit from the EM story. The strong implication is that investors should be building EM asset positions in their global …more