Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. INVESTING & PORTFOLIO STRATEGIES
February 26, 2014 12:00 AM

Emerging markets reward discipline, demand action

Ronald D. Frashure
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Ronald D. Frashure is chairman, Acadian Asset Management LLC, Boston.

    Here we are again. Poor recent performance from emerging markets equities, and the entire asset class is under review. We heard the negativity in early 2009, just prior to that year's 78% jump. We heard it at the end of 2011, just before 2012 saw emerging markets outpace the developed world en route to another double-digit return.

    The emerging markets asset class is not a market timer's game. Market timing is expensive. It's risky. And it's not necessary. For the 10 years ended Dec. 31, the MSCI broad emerging markets index saw an annualized return of 11.2%, more than 4% per year higher than developed markets. That 10-year period saw some white-knuckle ups and downs. Get even one of them wrong, and returns can evaporate. Steady exposure, on the other hand, was well rewarded over this period.

    We believe the key to success in emerging markets is disciplined, consistent exposure combined with active management. Whatever the short-term outlook for the asset class, investors have two very attractive opportunities — the ability to participate in the long-term growth of what is still the world's most dynamic economic sector, and the potential to benefit from active stock and country selection in an extremely diverse asset class.

    A clear and objective assessment of emerging markets right now, based on key attributes such as momentum, valuation and growth, presents a neutral outlook. Momentum is increasingly negative. Value measures are looking better after last year's historically large lag. Earnings are growing less quickly than in the recent past, though still at a higher rate than developed market counterparts.

    This makes for a potentially good entry point as we look to a year where the environment could shift more favorably. In our view, the impact of Fed policy on markets is likely to be more muted than in the past. Tapering is universally expected, and is likely to be both cautious and gradual. A bigger issue is the perceptions of positive policy change in some of the more high-profile emerging markets, such as China, Brazil and India. China policymakers seem to be saying some of the right things about reforming the economy and strengthening the financial system while trying to reduce risks from shadow banking, but investors will want to see more concrete evidence of success. Brazil must address binding economic bottlenecks such as infrastructure constraints and the crowding-out of private finance. India also has much to do, and upcoming elections are likely to have a significant impact on the prospects for more essential reforms.

    It isn't helpful for emerging markets sentiment to have major ongoing problems that cast doubt on governance at the national policy-setting level in countries such as Turkey and Thailand. These are not large countries, but some resolution of the issues here — which we would expect over the coming year — could be disproportionately positive. There are already some bright spots for policy change beyond the BRICs that could benefit future equity returns, such as Mexico.

    The biggest positive that we would see for emerging markets over the coming year is a better prospect for the world economy as a whole. A strengthening U.S. economy appears likely, with reduced monetary and fiscal risks. China (the second largest economy after the U.S.) might not hit 7.5% real growth, but seems unlikely to crash. Meanwhile, Japan is seeing some benefits from recent economic policy initiatives. Growth in these key economies will help to improve growth in emerging markets through trade links and should improve sentiment and funds flows as we go through the year.

    As global investors look for relative opportunities among equities this year, emerging markets are likely to come back on radar screens. Valuation multiples are attractive, with emerging markets price-earnings ratios significantly lower than those of developed markets on average (12.1 vs. 17.9), while emerging markets return on equity is somewhat higher (12.7% vs. 12%). Stabilization of currencies without the sharp drops vs. the U.S. dollar and euro for many emerging markets currencies over the last year should help sentiment, as well as obviously realized dollar-stated returns.

    And this is just at the index level. There is much an investor can do beyond sitting tight through the rough patches in a long-term emerging markets allocation. This is an asset class that calls for active investing. Active approaches, especially those that can gain exposure to small-cap stocks and frontier markets, have much greater scope to overcome the current emerging market malaise. Our current country forecast for emerging markets data shows considerable variation from top to bottom, indicating strong potential for active returns from stock selection and country allocation effects. Among the most attractive areas in our framework currently are Poland in emerging markets and Pakistan in frontier. The energy and telecoms sectors are offering some attractively valued companies with strong growth potential.

    Acadian has tracked hundreds of stock and country characteristics over many decades to analyze their relationships to subsequent returns. If markets are completely efficient, we would expect to find only random noise in stock prices, with low predictive power. Instead, there is strong evidence of persistent mispricings. These are related both to investor psychology — perceptions of risk, misapplication of information — and real structural barriers such as benchmark orientation and institutionally imposed constraints. Perhaps not surprisingly, our work has shown emerging markets to be one of the least efficient areas of the global investing universe.

    Given the broad evidence supporting long-term economic growth in emerging markets, the rich potential for active return, and the major risks associated with timing returns in the emerging markets asset class, the way forward seems very clear. As a former naval officer, I am tempted to use familiar metaphors of staying the course, steady as she goes. It may not be too steady in the short term but if the goal is to maximize long-term equity returns, we believe emerging markets remain an essential sea to navigate.

    Ronald D. Frashure is chairman, Acadian Asset Management LLC, Boston.

    Related Articles
    Investment implications of China's reform agenda
    eVestment: Ukraine crisis has limited impact on emerging markets fixed-income i…
    MSCI proposes including fraction of China A shares in EM benchmark index
    Maturing industry seen for emerging markets private equity
    Recommended for You
    More funds testing water on crypto-related assets
    More funds testing water on crypto-related assets
    Money managers eager to make leap to opportunity zone investing
    Money managers eager to make leap to opportunity zone investing
    Index investing: Not as passive as you might think
    Index investing: Not as passive as you might think
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    August 10, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit