SSgA: Be Choosy about Emerging Markets in 2014

(December 2, 2013) — Back away from BRICs but embrace Eastern Europe next year, State Street Global Advisors (SSgA) has told its investor clients.

Bill Street, head of investments for Europe, Middle East, and Africa at the international asset manager said there were returns to be made from developing equity and bond markets over the coming year, but investors should be choosier than they had been in the past.

Street said he was positive on the emerging market trend generally, but “it is not one rising tide”.

“The BRICs are still tied to developed market success,” said Street, referring to the largest economies in this category: Brazil, Russia, India, and China, “so investors need to look further afield in 2014.”

He said investors should not rely on beta-farming indexes that covered a large spectrum of countries as they would give away the gains made by the best-performing economies.

“The ‘tapering tantrum’ caused some large hits to some emerging market economies, and it is no surprise that the ones hit the most had the structural problems or the largest current account deficits,” he said. “Investors will have to be—and many are already being—more qualitative in their approach to these economies, but there are opportunities in 2014.”

Street added that the majority of money flowing into emerging markets was now coming from institutional investors, rather than their retail market counterparts, which meant the assets were “sticky” not “hot” and were therefore less likely to rush from the sector at the first sign of trouble.

He said with developments in the US and other large economies, there would be obstacles to negotiate even with the most assured emerging markets, but SSgA was structurally supportive of the asset class.

Regarding developed markets, Street believed the UK looked to be one of the strongest performers in 2014, with the US not far behind. SSgA has also taken a relatively bullish stance on Europe, and the Eurozone, buoyed by effective political movements and a reaffirmed confidence from market participants.