MARKET ANALYSIS


S


overeign debt crises, unorthodox monetary policies and political instability were once the hallmarks of emerging economies. Today,


these are more appropriate descriptions of the world’s three largest developed economies. Over the past year, the volatility of the supposedly riskier emerging market currencies was comparable to that of developed market currencies (see Figure 1). A permanent solution to the sovereign debt crisis in the eurozone remains distant. The Federal Open Market Committee has embarked on “Operation Twist” to resuscitate the U.S. economy after its failure to respond to two rounds of quantitative monetary easing. Japan’s economic woes are being exacerbated by its revolving door of prime ministers: parliament recently installed its 6th prime minister in less than ÀYH \HDUV 'HYHORSHG HFRQRPLHV· JURZWK UDWHV DQG investment returns are likely to remain lacklustre


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and well below trend in coming years. Investors, especially underfunded pension plans with a daunting chasm in their assets and liabilities, are turning to emerging market assets for higher returns.


Global Pension Plans are


Underweight Emerging Markets Presently, pension plans are grossly underweight emerging markets. Their average allocation, of about 5 per cent1


, is only a fraction of emerging markets’


market capitalisation in global equity indices of 13 per cent2


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and emerging markets’ share of global . Two major factors that have


contributed to pension plans’ underinvestment in emerging markets are: the relatively limited FKRLFHV RI OLTXLG GLYHUVLÀHG DQG ULVN FRQWUROOHG emerging market investment vehicles; and investors’


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Autumn 2011 | Currency Investor 47


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