The optimistic outlook for global emerging markets equities is being overplayed, Standard Life Investments believes.
Head of global strategy Andrew Milligan believes there is not enough evidence when examining GEM equity valuations to suggest they will outperform developed markets over the near term.
Milligan says despite record inflows into emerging market equities in 2009 and the growing recognition of the structural drivers in many emerging economies, the near term returns from emerging market equities will be no better than their developed economy counterparts.
Many investors assume GEM equities always provide superior returns compared to developed equity markets, he says, when in practice there has been considerable under-performance over certain time periods.
While some investors argue GEM equity valuations are justified on the basis of faster growth in these economies, Milligan says research carried out by the London Business School and others shows in practice there has been little clear relationship between real growth in GDP per capita and stock market performance, either in GEM or developed economies.
"It is certainly the case there are important structural drivers such as an expanding middle class supporting consumer spending, and more market friendly economic and monetary policies, that will support GEM equity markets going forward," Milligan says.
"However, our analysis shows when current valuation signals were seen in the past then near term returns from GEM equities have been no better on balance than their developed economy counterparts. In certain circumstances, such as a double dip recession in the developed economies, their future returns could be rather worse.
"Our preference for accessing these emerging market opportunities is via companies listed in the developed economic blocs, as they are better regulated, more liquid and are on valuation discounts to their GEM peer group.
"As an example, about one quarter of the profits of the UK's FTSE350 index comes from emerging markets. We currently see many opportunities in a range of sectors, for the benefit of our clients."
