With the Eurozone crises and attempts to boost developed world economies defining 2010, investment managers have predicted continued growth in emerging markets for 2011.
Head of asset allocation at asset managers Barings, Percival Stanion, said despite factious markets underlying economic data had been relatively good and 2011 presented some attractive investment opportunities.
“We remain positive on the wider investment case for emerging markets. The International Monetary Fund (IMF) expects emerging economies to have grown by 7.1% over the course of 2010, compared to just 2.7% in the developed world.
“We believe that urbanisation and industrialisation will continue to drive growth and we favour companies with exposure to the rapid rise in domestic consumption across a number of emerging territories,” he said.
Rising prices is leading to some concerns in emerging markets, with China likely to take steps to combat inflation. Other countries may take steps to prevent a rapid rise in the value of their currencies by restricting capital inflows.
Stanion also said monetary policy measures in developed economies that increased money in financial systems had made it difficult for investors to find good risk diversifiers.
“The historical lesson is that this type of super easy policy tends to boost prices of assets, particularly risk assets. Such intervention in the market pricing is concerning, effectively meaning that economic participants no longer know what the ‘risk free rate’ really is, potentially leading to significant misallocation of capital, ” he added.
Barings are cautious on the prospects for government bonds, given the low yields on offer, with equities seen as better value but likely to remain volatile.
Asset allocation director at Fidelity Investment Managers, Trevor Greetham, said developed market stocks could surprise positively in the longer term.
“I am relatively cautious on the eurozone as the ECB [European Central Bank] appears unwilling to print money or engage in competitive devaluation and speculative attacks are likely to continue. Spain will be the key to a more positive outcome.
“Its economy is too big to rescue with ease. However, it is a major manufacturer whose exporters would benefit from improved global demand and a recovery in growth would provide a boost in confidence for the entire region,” he said.
Greetham said bond markets would continue to fare better than equities until growth in the developed world became more ‘tangible’; however, once a global growth trajectory was established equity yields were likely to rise.
Greetham also said he expects emerging economies to become ‘decoupled’ from slower growth in developed economies ‘as domestic demand and competitive exchange rates shelter their economies from the dearth of growth in the developed world.’
Measures to tighten monetary policy in emerging market economies to combat inflation could have an impact on returns but, citing China as an example, Greetham said tight policy was a long way off where ‘nominal growth is in the double digits and interest rates are in low single digits.’
His conclusion was that the global economic cycle is likely to be short, creating volatility, and stressed the importance of maintaining a diversified portfolio in 2011.
© Fair Investment Company Ltd