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Emerging markets to reach one-third of world equity capitalisation, says Barings’ Stanion

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Investment in emerging markets is set to grow dramatically, creating massive opportunities for providers of exchange-traded funds that offer low-cost and liquid access to these markets, ac

Investment in emerging markets is set to grow dramatically, creating massive opportunities for providers of exchange-traded funds that offer low-cost and liquid access to these markets, according to speakers at a conference in London.

The weighting of emerging markets plus Hong Kong and Singapore in the MSCI All Country World Index is set to rise from around 11 per cent of market capitalisation at present to around a third over the next decade, according to Percival Stanion, head of asset allocation at Baring Asset Management.

‘We believe that emerging markets should deliver returns of around 11 to 12 per cent per annum over the next decade, while their western counterparts of produce around 7 to 7.5 per cent, but there will be bumps along the way as investors get over enthusiastic from time to time,’ Stanion told delegates at the debate, hosted by the London Stock Exchange and organised by Lyxor Asset Management, a wholly-owned subsidiary of France’s Société Générale and European leader in exchange-traded funds.

‘The path is well mapped out for emerging markets, and with it will come a series of changes to the world economy. The growth of middle classes in emerging market countries will create an explosion in demand for all the goods and services that American and western middle classes take for granted.’

Stanion noted that where funds giving pure access to specific countries were not available to investors, exchange-trade funds could fill the gap. ‘Credible global emerging market products with established track records do not necessarily always give investors the access they want,’ he said. ‘I might drill down into a fund and find it just gives access to five or six big country holdings. If I really like the country story and I want something pure, then I would use ETFs.’

This trend is already evident, according to Lyxor, with assets under management in its emerging market ETFs totalling EUR3.1bn at the end of August, 132 per cent more than at the end of last year and 722 per cent higher than in December 2005.

Robin Griffiths, head of global investment strategy at wealth manager Rathbones, pointed out that the Chinese economy would be the biggest in the world by 2015, and that emerging markets generally are experiencing an ‘awesome’ structural growth trend.

‘If the secular trend is stronger than the cyclical one, then a passive stance is better, while if the reverse is true, then it is much better to have an active stock-picking approach,’ Griffiths said. ‘At the moment, market conditions favour owning ETFs. These conditions are likely to change only slowly, over a matter of years.’

Hugh Brown, head of product development at the London Stock Exchange, said: ‘ETFs are one of the best ways of getting access to emerging markets. Asset allocation is a huge part of the investment process and investors often want to buy the country index, so the growth in the choice of ETFs is enabling them to do that. The trading volumes of ETFs are certainly growing at a faster rate than shares generally.’

A recent survey of investment intermediaries conducted by Lyxor found that almost half were recommending that clients allocate between 5 and 10 per cent of their portfolio to emerging markets, according to Daniel Draper, head of Lyxor’s ETF business for the UK, Ireland and the Nordic region and chairman of the debate.

The survey also found that 73 per cent of intermediaries believe investors need to increase their exposure to emerging markets, and 82 per cent believe that, given recent equity market volatility, emerging markets represent a good long-term investment opportunity. 73 per cent had a positive view about the long-term investment prospects for India and 52.1 per cent were positive about the outlook for South Africa

Created in 1998 as a subsidiary of Société Générale’s Corporate and Investment Banking arm, Lyxor currently manages EUR67.2bn in assets, including EUR22.1bn in its index tracking business and EUR 21.83bn in ETF assets, giving it a 26.4 per cent share of the European ETF market last March. The firm recently expanded into Asia with the launch of six ETFs in Singapore and six in Hong Kong.

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