Marino Valensise, chief investment officer at Baring Asset Management, believes that emerging market equities will trade at a premium to developed stocks in just five years time.
Valensise says emerging market equities are still not a consensus story despite the fact they currently account for 70 per cent of global GDP growth.
He says the US is a perfect example of a region that has yet to fully recognise the outstanding investment opportunities on offer. Currently, the average US pension fund’s allocation to emerging equities is one per cent, compared to 27 per cent to US equities and 13 per cent to international equities.
“We believe that within the next five years this will change radically as the US wakes up to the returns on offer and when they do, emerging market equities will trade at a premium to developed stocks. Indeed, it is little known that emerging Asia (MSCI EM Asia) outperformed the developed world (MSCI World) by 186 per cent over the last 11 years.”
On a regional basis, he says Indonesia, Thailand, Malaysia and Philippines are interesting as they are smaller and more inward looking markets based on domestic consumption, rather than those larger markets that are driven by exports and resources.
“Many of our current investment views evolve around the theme of domestic consumption. Emerging market consumers are spending more, regardless of the global trade environment. For example, Indonesia is relatively independent from developed countries and is now outperforming any other emerging market index.”
In terms of commodities, some have rallied a lot already whilst some have been left behind and because of this, investors need to look for value and not only go for the popular choice, says Valensise. For example, Barings has started reducing its positions in gold in its multi asset funds as prices have rallied strongly.
“Although we will keep a significant allocation to gold, we are excited by investments in agricultural commodities related stocks, which we expect to benefit from strong demographic dynamics and from the growth of GDP per capita in emerging countries,” says Valensise.
“Looking at the macro environment, we believe that moderate growth is the most likely outcome for the global recovery. The Fed remains concerned about deflation and we believe that it is conscious that going back to a normal policy tightening cycle could tip the economy into a deflationary tail spin. Further rounds of government bond purchases seem likely in the coming months. Other western central banks seem to be pursuing similar polices.”