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Emerging from the margins

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Sponsored column: At the recent local authority National Association of Pension Funds conference there was quite rightly a considerable focus on equities and emerging market (EM) equities in particular..

But we would also encourage local government pension scheme clients to spare a thought for emerging market debt/bonds. An interesting phenomenon is that though EM economies account for almost half of global gross domestic product (GDP), their bond market share is just 11%.

LGPS investors are still heavily underweight in EM debt, thanks to its common perception as a “niche” sector. But this view is ready for an overhaul.

The rebound in EM from this latest crisis shows how local strengths, including growing economies, credible monetary policy and deepening capital markets, are providing better buffers against global shocks. These add to the appeal of EM debt returns estimated to reach as high as 7%, or 12% on local-currency bonds, in 2010.

The case for EM investment today is backed by strong numbers: growth across the developing world is expected to top 5% in 2010, almost quadrupling the rate of advanced economies. But even more compelling than the numbers are the economic trends generating them.

Developed countries’ debt-to-GDP percentages were high and rising before 2007, and an estimated $20trn in public sector borrowing over the coming years, according to the International Monetary Fund, will push those percentages well above 100%.

Emerging economies’ debt-to-GDP levels have scarcely breached a third of that, and relatively strict controls on their government spending have kept deficits in the low single digits.

The trends are already in place that will help emerging economies transcend a volatile history. Foremost among those are strengthening national balance sheets, improving financial policies, and advances in capital markets depth and infrastructure, all of which have helped inflows to EM debt strengthen substantially over the past decade.

Their durability over that time suggests that these trends are sustainable in the long term, and in many cases they are the envy of the developed world.

An important legacy of the 2008 financial crisis is the challenge to long-held distinctions between EM and developed markets, and investors alert to the evolution of international capital markets are quickly realising that, in globally diversified portfolios, emerging markets no longer belong at the margins.

Tim Bird, head, local authority business, Goldman Sachs Asset Management

Column sponsored and supplied by Goldman Sachs Asset Management

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