Investors return to emerging markets
March 30, 2009
By Ethel Hazelhurst
Emerging markets may have weathered the worst of the financial storm and could benefit as massive pension funds, with yawning deficits, desperately seek higher yields.
Chris Hart, an economist at Investment Solutions, said last week that global investors who had left emerging markets as risk aversion rose were starting to return. The flow of investment was likely to accelerate as "some decoupling" took place between the developing and developed world.
Hart predicted the net inflows to countries such as South Africa would persist over the next five years.
"Pension funds (in the advanced economies) are showing increasing levels of distress as their deficits climb. They will never be able to meet their liabilities unless they diversify into emerging markets."
Even before the financial crisis, which had unfolded over the past two years, pension funds abroad faced the challenge of an ageing population because improved health care had kept people alive longer.
So the relationship between the working age and retired populations had become increasingly skewed. Now, just as the baby boom population reached retirement age, pension funds were faced with declining or negative returns.
"We will have a replay of the Japanese carry trade, but it will also involve investors in the US, the UK and Europe," he said.
Before financial problems reached crisis proportions late last year, the Japanese carry trade supported the rand. Carry trade involves tapping low interest rate money in countries such as Japan and investing the funds where interest rates or yields on other assets are higher. The sharp deterioration in global markets and rising risk aversion, which weakened the rand against the Japanese yen, temporarily halted the flows.
Hart believes investors from other countries will now be forced to seek better returns outside advanced economies, where short-term interest rates are at historic lows.
He said emerging markets had lower debt levels and higher growth rates than advanced economies.
"Private debt in emerging markets averages just 56 percent of gross domestic product, compared with 120 percent in the advanced economies."
The US was "borrowing from future potential growth" and its growth prospects were "tepid".
In a sign of returning confidence, non-residents have resumed investing in JSE-listed firms, after a net outflow of R54 billion last year and R675 million in January. Reserve Bank figures show a R4.6 billion net inflow last month and R13.9 billion by March 25.
Michael Power, an investment strategist at Investec Asset Management, agreed there would be some "decoupling on the upside".
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