The firm’s head of global strategy says despite record inflows into global emerging market (GEM) equities in 2009 and the growing recognition of the structural drivers in many of their economies, the near-term returns from emerging market equities will be no better than their developed counterparts.
“It is certainly the case that there are important structural drivers such as an expanding middle class supporting consumer spending, and more market friendly economic and monetary policies, that will support GEM equity markets going forwards,” said Mulligan.
“However, our analysis shows when current valuation signals were seen in the past then near term returns from GEM equities have been no better on balance than their developed economy counterparts. In certain circumstances, such as a double dip recession in the developed economies, their future returns could be rather worse.”
Milligan says there are a number of traps investors must be careful not to fall into when examining GEM equities.
First, he warns proper country analysis matters and that individual countries within the GEM universe will have very different futures. He says many investors assume GEM equities always provide superior returns compared with developed equity markets, when in practice there has been considerable under-performance over certain time periods.
Second, he says some investors argue GEM equity valuations are justified on the basis of faster growth in these economies. However, he says research, for example by the London Business School, shows in practice there has been little clear relationship between real growth in GDP per capita and stock market performance, either in GEM or developed economies.
As a way of gaining exposure to these markets, Milligan suggests investing in companies listed on a developed market stock exchange as they are better regulated, more liquid and are on valuation discounts to their GEM peer group.
