Investment Adventures in Emerging Markets

Investors Living in Emerging Markets are a Bullish Bunch!

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Part of my job involves putting myself out on a limb at times, and I have taken the risk of being subject to contrary (sometimes enthusiastically so) viewpoints. I’ve even been accused of being too optimistic about emerging markets, perhaps partly because my views often represent a stark contrast to dramatic news headlines. So when I took a look at the findings of Franklin Templeton Investments’ 2013 Global Investor Sentiment Survey (GISS),1 I was pleased to discover my longstanding optimism about emerging markets seems to be spreading among investors. According to the GISS survey, investors residing in emerging markets are more upbeat about their prospects this year and in the next 10 years than those in developed markets. Of special interest to me among the survey’s findings was that many investors seem to be at least recognizing the merit of investing globally, even if the bulk of their investment dollars stayed close to home. It still looks like most plan to keep the majority of their assets in their local markets (a “home country” bias), but many report they plan to up their allocations into other markets, including emerging markets.

According to the GISS, 58% of investors residing in developed markets believe their local stock market will be up this year, but investors in emerging markets were even more upbeat – 66% believed their local stock market would post a bullish performance in 2013.  Similarly, investors residing in emerging markets expected higher returns on their investments, with an average return expectation of 12% this year and 18% over the next 10 years. Those in developed markets expected a 7% average return in 2013, and 10% over the next 10 years. I find that noteworthy as growth rates in emerging markets are also expected to be generally higher than in developed markets this year, although stock market returns don’t always directly correlate with growth rates. In addition, we believe the easy monetary policies of central banks globally could drive more assets into emerging markets.

We think there are reasons to be encouraged that the bullish trends we’ve seen overall in emerging markets over the past decade could continue. Knowing that market sentiment can play a role in market direction, positive sentiment in the emerging markets just may be one of those reasons.

Of course, not every year is going to be a stellar year for emerging markets, and there will inevitably be periods of underperformance vs. developed markets.

The Fundamental Story – Growth

As I’ve noted before, if you look at the fundamentals, the growth rate of emerging markets in general last year bettered that of developed markets, and forecasters expect that to be the case again in 2013. The International Monetary Fund (IMF) projects GDP growth on average at 5.3% this year in emerging/developing economies generally, versus 1.2% in developed/ advanced economies generally.2 We anticipate this type of overall trend could likely be mirrored in coming years, too, and we believe emerging markets in Asia and Africa look to have particular potential in this regard.




Foreign Reserves – and Debt Loads

In 2005, emerging markets’ foreign reserves began to surpass that of developed markets generally, and the spread has been widening. Debt levels are also more favorable for emerging markets, in our view. Overall, the ratio of public debt to GDP in emerging markets has been declining, while in developed markets —  we all know what’s happening in Europe and the U.S. —  it has been going up.

That’s not to say emerging markets don’t face some fundamental concerns. Inflation has plagued emerging markets historically, and food and energy price increases can have a dramatically negative impact on people’s standard of living.  In the early 1990s, inflation was accelerating rapidly in emerging markets, particularly in Latin America. For example, Brazil’s inflation rate (as measured by the consumer price index) in the 1980s and ‘90s saw year-over-year percentage increases in the hundreds and even thousands. In the past couple of years, however, inflation has been cooling off in Brazil and some other emerging market economies. Consequently, interest rates have been coming down too as policymakers have more room to engage in stimulative economic measures. In the case of Brazil, the inflation rate has been running in the range of 5 – 7% over the past two years.



Investor Expectations – By Region and Country

Interestingly, by region, the GISS results reflected particularly strong optimism —and return expectations —in Latin America. On average, investors residing there had the highest expectations for their local stock market this year; 75% believed it will be up. I find that particularly interesting when juxtaposed against the negative attention that’s often given to the region, focused on poverty, crime and so forth. Apparently, there is more than one side to the story there.

On a specific country level, investors in India were the most optimistic (85%) about their stock market among all 19 countries surveyed, and expected an average rate of return on their investments of 15% this year. According to the GISS, Indian investors certainly have high expectations! While we don’t know exactly why these investors felt more upbeat, I can say my team and I remain optimistic about the country’s long-term prospects and believe after a trying 2012, new policy initiatives undertaken by the leaders hold potential.

One last finding from the survey that struck me as interesting:  Emerging markets in general boast youthful populations, which to us, is more favorable for long-term growth prospects than populations which are rapidly aging. The GISS revealed younger investors (aged 25 – 34) were more likely to expect to allocate assets to foreign markets (that is, outside their home country) both in 2013 (average of 40% vs. 30% for investors 35+) and over the next 10 years (average of 43% vs. 33% for investors 35+). Investors in all age groups expected they will be allocating a larger proportion of their investments to developed and emerging markets over the next 10 years, although the bulk of their investments still would remain in-country. I think the global-minded young investors have the right idea!

Want to see the rest of what our survey respondents had to say? 2013 Franklin Templeton Global Investor Sentiment Survey.

1. Franklin Templeton’s 2013 Global Investor Sentiment Survey was conducted online by ORC International in January 2013. The survey polled 9,518 investors across 19 countries.

2. Source: © 2013 International Monetary Fund. “Policy Actions Improve Prospects for Global Economy,” April 2013.   

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