By Andrew Short
As Boris Johnson pressed the Olympic flag into the hand of Rio de Janeiro’s mayor Eduardo Paes, he must have felt relieved it was our athletes competing and not the British economy. The UK has been sluggish for years and any hope of an increase in growth was dashed when a double-dip recession was announced early this year; however, in stark contrast, the Brazilian economy would be nearing a podium finish.
“The main reason to invest in Brazil is the power of the Brazilian consumer story.”
Carlos de Leon
Brazil has become one of the hottest destinations for foreign investment but, as is the same with other emerging markets, UK pension schemes have been slow to up their allocations to these areas.
There has been a healthy amount of talk about these markets but there is still a widespread bias towards more developed markets, according to T. Rowe Price emerging market portfolio specialist Todd Henry. “There are still pension plans looking at emerging markets for the first time, or they realise they don’t have enough exposure. Given how bad things have become in the developed world and knowing these plans need to achieve growth they’ve started looking at these markets,” he says.
Ashmore Investment Management head of research Jerome Booth has also observed this trend with UK pension funds and says there must be a shift in the mind-set of investors. He adds plans in the UK are seriously underinvested in areas like Brazil (and other developing markets) and – like Henry – believes institutional investors have a bias towards investing in their own region.
“We know from behavioural finance people invest in countries the same as themselves,” says Booth. “The largest problem in the institutional investment industry arguably is misaligned incentives, which causes massive herding. This is combined with prejudice about emerging markets and inexcusably deficient concepts of risk and uncertainty that lead to gradual allocation.”
Booth also makes the point that emerging markets are countries where the risk is priced in, as opposed to developed countries where it is not. For pension schemes that do not start increasing allocation to the emerging markets, they are ignoring most of the growth potential in the world in the near and long term.
In its most recent World Economic Outlook, the International Monetary Fund (IMF) forecast emerging market growth to 5.6% for 2012 and 5.9% for 2013, this was cut from 0.1% and 0.2% respectively on previous predictions. Even with this cut it still points to remarkable growth ahead of the developed world which the IMF predicts will only grow at 1.4% for 2012 and 1.9% in 2013.
Running out of steam
However impressive these figures may seem, schemes and investors who were cautious in upping their exposure to the emerging markets may feel their decision was justified.
Emerging market equities have had a bumpy ride since the start of the year and, for all the talk of a hard landing in China, Brazil’s GDP has fallen like it has been hit by Brazilian pugilist Esquiva Falcão. It has gone from 7.5% in 2010 right down to 2% currently.
The drag on growth in Brazil is largely being attributed to a fall in global commodity prices and decreasing demand from China, however this is not the case.
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