JAPAN - The adoption of new benchmarks by some Japanese pension funds is set to boost their holdings of emerging markets shares, says Goldman Sachs Investment Research.
But the average allocation by pensions worldwide still fails to reflect those markets' growing importance.
Speaking in London, Timothy Moe, Goldsman's chief Asia Pacific regional equity strategist, said Japanese pension funds including the $1.4trn Government Pension Investment Fund, are adopting Morgan Stanley Capital International's MSCI AC World index as benchmark, or adding separate emerging markets investments to their existing programs.
Some of the country's pensions previously used the MSCI Kokusai World ex-Japan index, with its more limited weighting in developing markets.
Moe said: "For the first time some Japanese pension funds will start buying them, and we feel very strongly that one of the clear, strong and almost undeniable trends over the next decade or two will be a flow of funds to emerging markets."
He said South Korea's market could benefit from buying first, due to its proximity to Japan and familiarity as a trading partner. Goldman Sachs expects 10% appreciation in the Kospi equity index over 12 months.
Exhaustive analysis by the firm revealed investors in developed markets hold $1.3trn of emerging markets equities, with US pensions owning 18% of this total, European counterparts half that, and Japan's pensions a further 0.6%.
By comparison, these regions' mutual funds own 60.2%, while insurance companies hold 1.5%.
Pensions globally put 3.6% of their assets, on average, in developing markets - well under half the 10% from mutual funds, and far below the 13% weighting those growth markets have in the MSCI All Countries World index.
"We think the [pension allocation] has no choice but to grow further in coming years," Moe said.
Current allocations are also, in his view, below what is justified by developing markets' 11% share of global stock market liquidity, 31% of total market capitalization, 37% of global nominal GDP and half the expected expansion in global GDP by 2020.
While Moe expressed bullishness about Asia ex-Japan in the long term, GSAM believes developed markets such as the US will outperform emerging counterparts in the near term, and north Asia including Japan will beat south Asia.
Moe prefers Taiwan and South Korea to south Asian countries such as India, whose markets are too crowded with foreign investors and whose current account deficit is funded by short-term portfolio flows "which cannot be relied on forever.
"We are at the less sweet part of the cycle for Asia than for the US," Moe said.
"Asia came out of the crisis in much better shape with less impaired balance sheets than developed markets, so Asia is now further along the cycle."
GSAM has also reduced its recommended exposure to China until mid-year, while Beijing tackles inflationary pressures.
Jim O'Neill, GSAM chairman, noted however that investors should still heed Chinese leading indicators above all others to gauge the direction of the global economy.
He added, even if China's GDP annual expansion to 2015 might not match the 10.1% recorded in 2010, its $6trn economy had contributed as much to global growth as America's since 2000, and added the equivalent of three economies the size of Great Britain's.
The BRIC economies - namely Brazil, Russia, India and China - would in aggregate exceed the size of America's by 2020, he said, while those of all the ‘Next 11' developing economies together will exceed the size of Japan's, he said.
O'Neill added, by 2020 China's economy will be larger than the eurozone's, whose importance he said was "overstated".
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