EM equities are becoming indispensable

Chess_boardInstitutional investors increasingly regard emerging markets as strategic investments, not tactical ones, according to a new report from Schroders' head of emerging market equities, Allan Conway.

These investors are responding to strong GDP growth in these markets with inflows of $95bn into emerging market equity in 2010.

However there is still widespread uncertainty about the best way to gain exposure, and the report seeks to debunk five “myths” about emerging market investing. A key target is the oft-touted claim that the best way to gain exposure is by investing in developed companies that do business in emerging markets.

Conway claims this is not an effective strategy and will always mean diluting the investment, since developed companies usually gain 50% or more of their income from developed markets. In addition, developed companies generally command a premium that investors need not pay if they shed their squeamishness and invest directly in emerging market equities.

Another supposed myth is the increasingly popular idea that investing in emerging market debt is safer than equities. Conway accepts that the “robust economic fundamentals in the emerging market world, with limited need for balance sheet repair” means sovereign debt from these countries is a better bet than many western countries.

But he argues that emerging market sovereign debt has undergone significant re-rating in the past ten to 15 years, and no longer represents a compelling proposition. In contrast, “emerging market equities have not yet been re-valued to reflect the improved fundamentals”, and are still attractive.

The report also argues in favour of active management rather than passive exposure via exchange-traded funds (ETFs), and encourages investors to seek out specialist managers who pursue a global approach, rather than giving their existing managers discretion to invest in emerging markets.

©2011 funds europe