Investors become selective, finding that not all emerging markets are created equal

Market volatility has forced strategic move from buy-and-hold to stock-picking

By Minda Smiley

Jun 16, 2014 @ 1:21 pm (Updated 3:02 pm) EST

emerging markets, investors, brics, volatility, buy-and-hold, stock pickers

As emerging-markets economies reform at varying speeds, institutional investors have become more tactical with their investment strategies.

“Because investors are more skeptical about the future of certain emerging markets, they are going to be much more opportunistic,” said Julia Lawler, senior vice president and chief investment officer at Principal Financial Group, which commissioned a newly released survey on investor sentiment toward emerging markets. “You're going to have to be able to pick the right countries as well as the right securities in those countries. We expect to see investors use a more active than passive strategy.”

In a statement, Barb McKenzie, chief operating officer of Principal Global Investors, said emerging markets countries "embracing a reform agenda" are more attractive to investors.

While nearly 35% of the survey respondents believe China will deliver strong returns over the next three years, only 15% believe Brazil can do so, according to the survey, which was conducted by Create-Research. More than 50% believe China will make significant progress in implementing necessary economic reforms while only 6% believe Russia can do so.

“The view is that China will have the strongest of the emerging markets economic performance. They're going through a lot of strong structural reforms, though we might argue that they have a long way to go," said Ms. Lawler. "Given some of the other emerging markets, the view is that of those markets, China will perform the best.”

Investors have become more discerning because of volatility in emerging markets, making such investing tactical instead of buy-and-hold. According to the survey, investors who view emerging-markets assets as an opportunistic play has increased 48%, from 30% for equities since 2012 and to 51%, from with 15% bonds since 2012.

“While emerging markets in the East continue to converge with developed markets in the West, it is clear from our research that emerging economies will no longer move in lock step,” Professor Amin Rajan, chief executive of Create-Research and author of the report, said in a statement. “This could be the age of stock pickers, as catchy acronyms such as BRICS become irrelevant.”

Respondents were optimistic about the U.S. as a driver of the global economy. Almost half of investors believe the U.S. recovery will deliver the best returns over the next three years and nearly 65% believe the U.S. government will make significant progress in rebooting its economy. Thirty percent of investors view the outlook for Europe as cloudy, with isolated pockets of revival expected only in the U.K. and Scandinavia.

Create-Research surveyed more than 700 pension plans, sovereign wealth funds, pension consultants, asset managers and fund distributors across 30 countries with combined assets under management of $29.7 trillion. The survey was followed by 110 interviews.