(February 15, 2013) — Institutional investors should consider overweighting emerging market equities–such as Chinese or Brazilian stocks–at the expense of US equities, according to a market outlook report by Cambridge Associates.
“Today, emerging market equities offer the best risk-reward trade-off from a long-term perspective, particularly when compared with US equities,” said Celia Dallas, director of Investment Strategy Research at Cambridge Associates, a global provider of independent advisory services and research to institutional investors and private clients. “Within emerging market equities, most of the discount is concentrated in cyclical sectors such as financials and energy, while ‘defensive’ and consumer-oriented sectors like consumer discretionary, consumer staples, telecoms and utilities all look relatively expensive.”
The report noted that although emerging market equities are well above developed markets from a valuation standpoint, a discount does still remain. “Emerging market equities now stand near their 2008 level of relative valuation, which proved to be an attractive buying point…Nonetheless, they’re only ‘cheap’ when compared with US equities,” Cambridge Associates said in a statement.
According to Dallas, institutions may achieve outperformance by locking in profits from emerging market consumer-related and defensive stocks and tilting allocations to more cyclically oriented emerging market managers or an emerging markets index.
At the same time, investors must consider major headwinds–namely the US debt negotiations, the crisis in Europe, and the possibility that China is in or will have a hard landing, the firm warned.
Analysts at French bank Societe Generale published a note last month claiming that investors’ worst case scenario is dramatically underestimated and a hard landing for China is more likely than most believe. The bank’s China specialist believed there is a “non-negligible risk” of a hard landing by the world’s second largest economy this year, even though it has slipped down investors’ list of concerns. The Chinese economy is still imbalanced, the bank noted, as it relies too heavily on investment to fuel GDP while its net exports have fallen steadily since 2008.