Institutional investors' interest in emerging markets will continue in 2011 with assets likely to flow at a steady pace, if not a flood.
Recent figures from the Institute of International Finance (IIF) showed emerging markets capital flows soared 34% in 2010 to $910bn, up from $600bn in 2009. The IIF expects flows to continue upwards to $960bn in 2011 and to finally surpass the $1trn mark in 2012.
Asset managers are betting they’re right. If recent reports are any indication, this year we’ll see new investors accessing emerging markets in different ways.
Nick Lyster, European chief executive at Principal Global Investors, told GP this month he has seen more and more pension funds in emerging markets bypassing global equities in favour of emerging markets equities. (See here)
Meanwhile, Nomura Asset Management said it will launch an emerging markets small-cap strategy that adjusts GDP for purchasing power parity with an aim to invest in countries and companies that will generate more wealth than others. Goldman Sachs Asset Management launched its “Next 11” fund that also weights emerging countries based on GDP. (Visit www.globalpensions.com to read more)
Finally, a report by State Street Global Advisors on the investment activities of sovereign wealth funds show an increased interest in emerging market debt as yields on traditional asset classes have tumbled.
The interest has put pressure on policy makers to manage currency and inflation issues. The IIF noted they could cut interest rates, restrict capital flows, tighten fiscal policy to slow growth or allow their currencies to appreciate against more mature economies.
Each option has its risks. Cutting interest rates could lead to an extreme boom-bust cycle, while capital controls, for example, have rarely “addressed macro-prudential concerns and most have instead distorted capital allocations”, the IIF said.
It appears the success of emerging markets investors in 2011 will, to some extent, come down to policy decisions beyond their control.
Raquel Pichardo-Allison, Editor
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