IMF: Pensions May Flock to Emerging Markets

(September 14, 2011) — A recent report by the International Monetary Fund (IMF) notes that pension and insurance funds may up their investments in equities along with other riskier assets in emerging and developing countries.

According to the group’s Global Financial Stability Report, historically low interest rates in industrialized markets are threatening pension plans in Canada, Germany, Japan, Switzerland, Britain and the United States. Due to the low interest rate environment of those markets, pension and insurance vehicles are being left underfunded as a result of their reliance on traditionally safe investments, which are yielding little or nothing.

Consequently, the IMF reported noted opportunity in more aggressive, relatively riskier assets.

The report stated: “Investing in emerging markets is seen as potentially increasing portfolio returns without taking on excessive risk. A number of factors contribute to this view, including (i) underweighting of emerging markets in most portfolios (although exposure was already increasing before the crisis), so that emerging market assets can help diversify portfolios; (ii) low returns and increasing risk in advanced economies; (iii) a favorable view of the liquidity available in most large emerging markets; and (iv) an improvement in economic outcomes and a decline in policy risk in emerging markets.”

In addition, the report concluded that new regulations designed to help lower exposure to high risk investments may actually be undermining global financial stability. “With many first-time investors taking advantage of the relatively better economic performance of these countries, the risk of a reversal cannot be discounted if fundamentals — such as growth prospects or country or global risk — change,” according to the report. “For larger shocks, the impact of such reversals could be of the same magnitude as the pullback in flows experienced during the financial crisis.”

The full report will be released September 21.