Emerging markets have been the hunting ground for growth investors over the last decade, and rightly so: FE Analytics data shows that the MSCI Emerging Markets index has returned 311.57 per cent over 10 years, beating the major developed markets by more than 150 percentage points.
Performance of indices over 10yrs
Source: FE Analytics
However, it has been a different story recently. The MSCI Emerging Markets index has underperformed over one and three years and has lost 1.66 per cent year-to-date, while the likes of the UK and US have delivered double-digit returns.
Bakkum (pictured), senior emerging markets strategist at ING Investments, says that because developed economies have learnt from mistakes in the past, investors can expect those markets to deliver higher growth in the future. However, while the likes of the US, Europe and the UK have implemented policies to re-invigorate their economies, he says emerging markets have just sat back, which has had a detrimental effect on their growth outlook.
"Emerging markets have had a rough time recently. Over the past two and a half years, their economic performance has stayed behind that of developed markets," Bakkum explained.
"The debt crisis has led to meaningful change in the US and Europe. In the US, the banking system has been cleaned up and the economy appears to be moving again. Lower energy prices and years of cost cuts are pushing the American industry forward again."
"As to Europe, much has changed in Greece, Spain, Portugal and Ireland, where the crisis forced a sharp drop in wages, which is clearly leading to more competitive power. The first cautious signs of recovery are slowly becoming visible."
"Overall, we see major changes in the US and Europe, while Japan has also clearly set itself apart with its great monetary decisiveness. The emerging world looks a bit pale by comparison."
"The source of the debt crisis obviously lay in the developed markets, and the urgency of reform was simply greater in the US and Europe. Still, it is disappointing to see how little economic reform has taken place in the emerging world in these past years."
"This is one of the main reasons why economic growth has dropped in the emerging markets. Their competitive strength has weakened, and their economic instability has grown," Bakkum added.
"While growth prospects for the US, Europe and Japan are still not great, their chance of improvement has clearly improved. The emerging markets seem to have little room for recovery," he said.
"Substantial job-market reform, less government intervention in the economy, a better investment climate and more room for infrastructural investments in government budgets would have a positive impact on potential growth in emerging markets."
"But except for Mexico and India, we see little initiative in this direction," he added.
Bakkum says the fact that investor sentiment is now also turning against emerging markets bodes badly for investors in the sector.
"Reform fatigue and lagging growth will continue to frustrate emerging markets in the coming years," he said.
"The chance that the US, Europe and Japan will continue to perform better is large. In the past months, we have seen flows to emerging debt starting to reverse. Currencies have come under pressure."
"If market nervousness about Fed quantitative easing continues, emerging markets will face more capital outflows. This risk comes on top of the structural negatives for emerging markets growth."
"The underperformance of emerging markets assets is likely to continue," he added.
Performance of indices over 3yrs
Source: FE Analytics
Bakkum’s thoughts contrast with those of Carmignac Gestion’s Didier Saint-George, who recently told FE Trustnet that though growth in emerging economies may be slowing, plenty of opportunities are being created through governments who are increasing the living standards of their electorate.
However, Schroders' chief economist Keith Wade is more aligned with Bakkum’s view.
"Signs of slowing momentum have led us to revise down growth forecasts for the BRIC aggregate," Wade said.
"China showed signs of slowing as we left the first quarter and headed into the second, activity in Brazil continues to show meagre improvement and the central bank embarked on a rate-hiking cycle, and Russia continues to be afflicted by its proximity to Europe and the weakness of the global oil price."
"On a more positive note, the reduction in inflation in India and the prospect of further monetary easing have led us to marginally upgrade growth in both 2013 and 2014," he added.
