The answer it seems is from people like us as citizens in developed market countries realise we are “finally turning a corner” as job creation and spending patterns become more robust.
The US economy is projected to grow by 2.8% in 2014, from 1.8% last year, while the eurozone is expected to grow 1.1% this year after two years of contraction.
But what about the emerging markets, urged to “adopt structural reforms that promote job creation, strengthen financial systems, and shore up social safety nets”?
Actually, 2014 growth is forecast to rise for these nations to 5.3% from 4.8% last year, though the outlook is less rosy for two of the biggies – Brazil is slowing to 2.4% from 4% and China to 7.7% from 8%.
GDP growth of 7.7% is the envy of the West still, of course, though the Bank also warned that if the adjustment to tapering proves disorderly, financial flows to developing countries could decline by as much as 80% for several months.
“Reassuringly, the World Bank suggests that world economic growth should counteract the impact of any increase in interest rates on developing economies,” says Andrew Humphries, director at St James’s Place Wealth Management.
“The World Bank and the IMF are right to urge emerging economies to bolster currency reserves, balance sheets and competitiveness. However, it is worth remembering that although growth and structural reform are good for stable markets and long-term investments, the benefits take time to translate into rising stock prices.”
Emerging markets may just be the big contrarian call for investment managers presently. Pat Ryan, manager of Lazard Global Equity Income Fund, which can hold a potential maximum 25% weighting to the developing world, might fall into that contrarian category.
He says: “It is worthwhile taking a closer look at emerging markets companies, which generate both a higher dividend yield and a higher free-cash-flow yield than the developed markets, amazing considering these companies are actually reinvesting in their businesses to drive growth, while many developed market companies are essentially being run for cash with little capital expenditure or hiring.
“We tend to compare a company’s valuation to its financial productivity, its ability to generate strong returns on capital and free cash flow. When we combine the consistently higher level of financial productivity in the emerging markets with its relative valuation, a 30% discount to developed markets on a trailing P/E basis per MSCI, it is not surprising that the portfolio is heavily skewed toward the emerging world.”
Retail investors have been steady sellers of emerging markets since 2010, but having sold most of what they accumulated in the recovery from the 2008 financial crisis, Ryan believes they would seem to have a limited ability to sell more.
“More broadly, a synchronised global expansion supports equities in all places,” he adds. We can only hope this year proves him right.
