SSgA Urges Investors to Seize Opportunity in Smaller Emerging Markets

(March 31, 2011) — A report by State Street Global Advisors’ (SSgA) shows that institutional investors should look toward smaller emerging markets to boost returns.

According to research carried out by SSgA’s Active Emerging Markets investment team since January 1997, BRIC countries (Brazil, Russia, India and China) have underperformed a group of smaller countries within the emerging world. As of March 2011, according to the firm, non-BRIC emerging market countries outperformed BRICs by 39%.

“Investors, while maintaining a core exposure to BRIC countries, should not close their eyes to other growth areas in the emerging world,” Chris Laine, portfolio manager for active emerging market equities at SSgA, said in the report. “Many of the smaller emerging and frontier economies have quietly been making investor-friendly reforms and deserve the attention of international investors,” he said, referring to the smaller markets of Columbia, Turkey, Chile, the Czech Republic, Egypt, Hungary, Israel, Peru, Poland, Thailand and the Philippines.

“Many of these economies offer value, growth and solid profitability,” he added.

The research from the US fund management company, which has about $75 billion in assets under management in emerging market equities, gibes with a recent article from the latest issue of aiCIO Magazine, which questioned whether emerging markets may be the next bubble, reflecting concerns from some investors who question whether these relatively small markets can handle all the money flowing into them.

“Emerging markets play a role within the portfolio, but just because everyone is plowing into it, doesn’t mean everyone should,” said Rogerscasey’s Adam Tosh. Tosh did not discount the tremendous growth and success of emerging markets, but he offered a skeptical tone, expressing worry that the euphoria of emerging markets may be blinding investors from critically examining potential issues within the asset class, as huge portfolio flows pose the risk of inflating the sector’s valuations to the point of overheating. Smart investors, he said, would position themselves well by achieving further diversification with frontier markets, gaining emerging market exposure with an eye on liquidity to capture the inefficiencies of less developed economies.

While highlighting the potential of smaller emerging markets for institutional investors, SSgA’s report stressed the imperativeness of diversification, especially following recent crisis in the Middle East. The report stressed that even with the allure of higher returns from smaller emerging and frontier economies, institutional investors should continually strive to spread their eggs over several baskets.