Investors must focus on destination in emerging markets rebalancing
Around 80 per cent of world economic growth will occur in so-called emerging markets in the next 10 years, during which time investors must remain focused on the destination rather than be left behind, according to Investec Asset Management Strategist Michael Power.
Currently 85 per cent of the world's mobilised capital is still within western economies, but this might soon change, and western governments might become nervous about how much capital could flow offshore in the coming decade, according to Power.
It is almost certain that net capital will flow from the West to the East in this decade, he said.
Some flows will occur through western multinationals investing in the rest of the world, and also directing capital on behalf of western investors. Asset classes like commodities will also benefit from the rise of the East and will attract Western capital, as will property funds focused on the new world, Power said.
While equities will grab the lion's share of the headlines, possibly the biggest geographic shift will come in the fixed income segment: local currency emerging market debt will likely be the biggest winner in all asset classes in the next 10 years.
Other fixed income winners will include emerging markets corporate debt and credit, Power said.
Cash management will also change its character as global investors increasingly insist on their portfolios containing currency overlays.
Although the US dollar will likely remain the favoured unit of account for those portfolios, it will not necessarily be the default holding in all globally-oriented cash funds, Power said.
The process of displacement as the East supersedes the West will be noisy and messy, and will not occur in a straight line. Australia will be one of several resource-rich countries along with the likes of New Zealand, Canada and Norway that will become honorary members of the new world economy, he said.
The key objective for all investors in the coming decade, whether from the West or from the rest, must be to focus on the destination and not be left behind, Power said.
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