New research from State Street Global Advisors (SSgA) has revealed that smaller emerging markets have outperformed the Brazil, Russia, India and China (BRIC) group of countries.
The research, based on SSgA’s Small Emerging Markets strategy, compares the MSCI BRIC index against a group of 11 smaller developing countries, including Chile, Egypt, Hungary, Israel and Thailand. The research found that from January 1997 to March 2011, the smaller non-BRIC countries outperformed the BRICs by 39 per cent.
According to SSgA active emerging market equities portfolio manager Chris Laine, investors should maintain their exposure to the larger emerging markets, but should be mindful of other opportunities in the developing world.
“Many of the smaller emerging and frontier economies have quietly been making investor-friendly reforms and deserve the attention of international investors. Many of these economies offer value, growth and solid profitability,” Laine said.
The SSgA research also indicated that bubble fears about emerging markets was misplaced, since stocks in developing countries are trading at 11 times forward earnings. This was right in line with the market’s seven-year average, Laine said.
The research also looked at the sovereign credit default swap market, and found developed countries posed a greater risk than emerging countries.
“On a short-term basis, emerging market equities do have a higher degree of volatility, but if we think about longer-term systemic risks, emerging markets appear to us to have more favourable characteristics. Lower government debt burdens and healthier consumers suggest that emerging markets will continue to attract capital,” Laine said.
Looking at merger and acquisition and initial public offering activity for the past few years, investors and investment banks are positioning for this growth to continue, he said.
Investors should be considering whether their current allocation to emerging markets is suitable given the risk/return trade-offs, he added.
