Two emerging markets specialists have explained why developed market equities are outperforming countries such as China.
Anne Richards, global chief investment officer at Aberdeen Asset Management, said economic growth was not a proxy for equity market performance, with the MSCI Emerging Markets Index severely underperforming the MSCI World Index in the last 12 months despite higher growth rates in the underlying developing economies.
The MSCI Emerging Markets Index returned 15.2 per cent for the year to June 30, 2013, compared to the MSCI World ex-Australia Index, which returned 33.1 per cent.
Over three and five-year periods, emerging markets underperformed the broader global equities universe by a significant margin.
“There’s little correlation between equity market performance and GDP growth. The link is weak at best because economic growth does not guarantee strong investment returns,” Richards said.
Jason Hepner, investment director of global strategy at Standard Life Investments, says emerging market economies are marked by lower debt to GDP levels than developed countries, but large amounts of leverage have been built up by emerging market corporations and households.
In China, private credit plus “social financing” has risen from less than 130 per cent of GDP in 2009 to more than 170 per cent in 2013, while the corporate sector’s debt burden is currently close to 125 per cent of GDP.
“These levels paint a dramatically different picture of the economy than its rather benign sovereign debt position – China’s sovereign debt position is closer to 60-to-70 per cent – and highlight the difficulty of assessing the health of these economies using sovereign-balance-sheet analysis alone,” says Hepner.
Additional reporting by David Rowley.