GLOBAL - Emerging markets equities will trade at a premium to developed stocks within the next five years, Baring Asset Management predicts.
Chief investment officer Marino Valensise said emerging market equities are still not considered a mainstream investment by pension funds despite currently accounting for 70% of global GDP growth.
The US is a perfect example of a region that has yet to fully recognise the "outstanding" investment opportunities on offer, he added.
"Currently, the average US pension fund's allocation to emerging equities is 1%, compared to 27% to US equities and 13% to international equities," Valensise said.
"We believe that within the next five years this will change radically as the US wakes up to the returns on offer and when they do, emerging market equities will trade at a premium to developed stocks. Indeed, it is little known that emerging Asia (MSCI EM Asia) outperformed the developed world (MSCI World) by 186% over the last 11 years."
On a regional basis, Barings likes the ASEAN 4 (Indonesia, Thailand, Malaysia and Philippines) as they are smaller and more inward looking markets based on domestic consumption, rather than larger markets driven by exports and resources. Many of its current investment views evolve around the theme of domestic consumption, Valensise continued.
"Emerging market consumers are spending more, regardless of the global trade environment. For example, Indonesia is relatively independent from developed countries and is now outperforming any other emerging market index.
"In terms of commodities, some have rallied a lot already whilst some have been left behind and because of this, investors need to look for value and not only go for the popular choice. For example, we have started reducing our positions in gold in our multi asset funds as prices have rallied strongly."
Barings said although it will keep a significant allocation to gold, it is excited by investments in agricultural commodities related stocks, which it expect to benefit from strong demographic dynamics and from the growth of GDP per capita in emerging countries.
"Looking at the macro environment, we believe that moderate growth is the most likely outcome for the global recovery," Valensise added. "The Fed remains concerned about deflation and we believe that it is conscious that going back to a normal policy tightening cycle could tip the economy into a deflationary tail spin. Further rounds of government bond purchases seem likely in the coming months. Other western central banks seem to be pursuing similar polices."
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