Planners overlook growth potential of emerging markets

Investors and financial planners are keeping away from investments in emerging markets due to a combination of home bias, lack of information and selected bad news from the sector, according to Capital Group vice president Andy Budden. 

“There is an unknown aspect to emerging markets that does require a mindset change and requires people to go beyond the attitude that things are good at home so why look overseas,” Budden said. 

At the same time emerging markets for many in Australia are only those in Asia forgetting the growing economies and populations of Latin America.” 

Volatility was one of the key pieces of bad news surrounding emerging markets according to Budden but it was also a factor in developed markets which had suffered three significant falls in the last 15 years which had wiped off many gains. 

“The conventional wisdom is that volatility equals return but there have been three periods in the last 15 years where that has not happened and despite good returns many people have not regained the losses of 2007. The fact is volatility kills long-term wealth generation.” 

However he said volatility can be overcome through exposure to a broad range of securities in emerging markets or those in developed countries that have an economic exposure to emerging markets. At the same time, Budden said Capital Group reduces volatility by considering equities, dollar sovereign bonds, local currency government and corporate bonds and local currency trading. 

“The non-equities space is a far larger universe in emerging markets with bonds often offered in local currencies and were corporate bonds are currently at $1 trillion and growing,” Budden said. 

Despite the reluctance Budden says emerging markets are likely to have their time in the sun as emerging market economies are projected to outgrow those of developed economies over the long term by 10 per cent. 

“Mature markets have aging populations and that will impact economic growth while emerging markets have less aged people, a growing work force and a growing middle class consumer market,” Budden said. 

Capital Group is an emerging market specialist fund manager based in the United States and opened a fund in Australia in 2011.

Capital Group senior vice president Paul Hennessy said it was already in use by some planners and platforms but was currently going through the ratings process with research houses.