Emerging markets equities could get as much as $8 trillion in new institutional investment over the next 20 years as pension funds and other institutional investors are seen possibly tripling their allocations to the asset class by 2030.
“The trend (to raise emerging market allocations) is what we've seen and expect going forward,” said Will Tsui, senior investment professional at Hewitt EnnisKnupp, a Chicago-based investment consultant.
The growth in emerging markets equities is driven by a projection that the asset class will overtake developed markets to have the largest share of the global equity market, according to new research from Goldman Sachs Group Inc.
Aggregate emerging markets equity allocation among investors based in developed markets will rise to at least 18% by 2030, from the current 6%, predict Timothy Moe, Goldman Sachs chief Asia Pacific regional equity strategist, and Caesar Maasry and Richard Tang, both members of the Asia Pacific portfolio strategy team, and co-authors of a 48-page report, “EM Equity in Two Decades: A Changing Landscape.”
That increase would mean those investors could purchase at least $4 trillion in emerging markets equities over the next 20 years — and could be as much as $8 trillion if “only moderately higher assumptions” are used for real growth in assets and emerging market allocations, they wrote in the report.
By 2030, emerging markets equity capitalization would rise to $80 trillion, or a 55% share of global equity, the authors estimate. By contrast, developed markets could rise to $66 trillion, or a 45% share of global equity.
A Mercer Inc. statement on a study released Sept. 16 contends, “Institutional investors are limiting returns and retaining unnecessary risks in their equity portfolios by continuing to bias investment toward developed economies.”
“The continued strong growth in developing countries with favorable features such as young and expanding populations is not being captured adequately by many investors.”
Among Hewitt EnnisKnupp clients, large corporate and public pension funds, “the (emerging markets equity) search activity has definitely been more brisk than two years ago,” said Mr. Tsui, who hadn't seen the Goldman Sachs report.
In the past 12 to 15 months, Hewitt EnnisKnupp has conducted 15 to 20 searches with portfolio mandates ranging from $5 million to $200 million, Mr. Tsui said. Most of the activity has been for global equity strategies that include discretion to allocate some assets to emerging markets, while some have been for emerging markets equity specifically, Mr. Tsui said.