Smaller Emerging Markets Outperform The BRICS, Says State Street Global Advisors

Harriet Davies

31 March 2011

The advance of emerging markets is not confined to Brazil, Russia, India and China, as a group including lesser-known emerging economies have outperformed the BRICs since 1997, State Street Global Advisors says.

The group of countries is Chile, Colombia, Czech Republic, Egypt, Hungary, Israel, Peru, Poland, the Philippines, Thailand and Turkey, and SSGA says that over the period January 1997 to March 2011, these countries outperformed the BRICs by 39 per cent.

“Investors, while maintaining a core exposure to BRIC countries, should not close their eyes to other growth areas in the emerging world. Many of the smaller emerging and frontier economies have quietly been making investor-friendly reforms and deserve the attention of international investors. Many of these economies offer value, growth and solid profitability,” said Chris Laine, portfolio manager for active emerging market equities at SSgA.

Loose monetary policies in the West have spurred worries of a bubble forming in the emerging world, as so-called hot money flows have sought higher returns from riskier asset classes. But SSgA says that at 11 times earnings, the broad emerging markets asset class is not experiencing a bubble.

“While it is true that emerging markets no longer trade at a significant discount relative to developed markets, it is hard to say that an asset class trading at 11 times forward earnings is in a bubble. This is right in line with its seven-year average,” Laine added.

Laine even says there may soon be a compelling argument to award emerging markets a premium, in a reversal of the status quo. This might be the case, he says, if these markets continue their trend towards greater development and transparency.

The firm also analyzed the credit default swap market, and concluded the market may now be judging developed markets as having higher levels of sovereign risk. Of the 20 countries with the largest sovereign CDS spreads, only four countries are classified as emerging, while six are developed, SSgA found.

Sovereign bond crises were until recently the preserve of developing countries, but the aftermath of the financial crisis saw a number of Eurozone countries have their sovereign debt downgraded by ratings agencies such as Fitch, and spreads among Eurozone economies widen.

Laine concluded: “The uptrend for emerging markets is clear and in my opinion should continue. Looking at M&A and IPO activity for the last few years, investors are positioning for this growth to continue. Investors should be considering whether their current allocation to emerging markets is suitable given the risk/return trade-offs.”