Why is there an emerging market investment shortfall?

Emerging markets are outperforming developed markets yet most of the panel’s investments are in Europe and North America. So, what’s holding back emerging market investment?

The familiarity trap

Investors are largely staying on well-trodden ground, focusing on developed markets. Almost two-thirds (64 per cent) of the $50 Trillion Investor Panel’s assets under management (AUM) is invested in Europe and North America. Asia, which includes a number of developed markets, takes 22 per cent, whereas only 10 per cent is invested in the Middle East, Africa and South America combined.This is despite 88 per cent of investors saying their emerging market investments have matched or outperformed developed markets over the past three years.Higher-growth investment houses – those growing their AUM by 5 per cent or more annually in the past three years – are almost three times more likely than lower-growth firms to record significant emerging market outperformance, suggesting that emerging market investments are playing an important role in growth.Similarly, higher-growth investment firms are benefitting from greater emerging-market exposure: these firms had an average of 37 per cent of AUM allocated to emerging markets (Asia, the Middle East, Africa and South America) in 2019, compared to an average of 27 per cent for lower-growth firms.The good news is that investors are set to increase their exposure, with a majority of our $50 Trillion Investor Panel expecting to grow their investments more in emerging markets than in developed markets. Similarly, those who predict a reduction in their investment, think this will happen to a lesser extent in emerging markets. The gap may be starting to close.

^₂_{The remaining 5 per cent chose “not applicable”}

_³ _{Percentages show investors who are seeing outperformance or underperformance. Respondents not featured in the graphic either reported neutral market performance or did not invest in a particular category of emerging market.}

ASEAN: The engine room of growth

ASEAN will be an area of focus over the next three years, with 39 per cent of the panel looking set to increase investment in this region, compared to just 5 per cent who plan to reduce investment. The percentage rises among the 10 largest asset management firms, where 68 per cent said they intend to increase investment in the next three years.

On balance, high-growth firms are more likely to favour ASEAN markets than low-growth firms.

Thailand had the biggest percentage of high-growth investors citing it as a key focus for their firm's emerging-market investment strategy (45 per cent).

The risks

While structural issues – such as those pertaining to property rights, legal certainty, institutional strengths, and general market transparency – have been called out as blockers on the flow of capital into some emerging markets, perceived environmental and social (E&S) risk is also a major barrier to investment.More than two-thirds of investors believe the markets are high-risk, compared to 42 per cent for developed markets. Issues highlighted by investors included market volatility (61 per cent), bribery and corruption risk (57 per cent), government interference in business (52 per cent) and political risk (45 per cent).Concerns about risk persist despite evidence of strong returns: only 7 per cent of investors say that their emerging market investments have performed worse than their developed market investments over the past three years.

How do we address the perception that emerging markets investments are risky?

^{_{The perception of heightened E&S risk in emerging markets is just that: a perception. The reality on the ground tells a different story and what’s fascinating in this research is that investors have clearly articulated that they are seeing huge financial value in emerging market investments. We now need investors to get comfortable with E&S risk in emerging markets. But entrenched perceptions are hard to shake.

In practice, the E&S risks that exist in the emerging world are there in developed markets too, perhaps to an even greater extent. The most memorable failures of – for example – E&S risk management in recent years have almost all been in developed markets. What’s more, empirical evidence has shown that emerging markets are not inherently riskier from an E&S perspective.

How then do we quell the persistent misnomer of increased emerging market E&S risk? Through experience. This report shows that there is demand for emerging market investments from a returns perspective; we now need to educate and inform investors from an E&S risk perspective.}}

Amit Puri
Managing Director, Global Head,
Environmental and Social Risk Management, Standard Chartered

_^POLL
Do global investors have an emerging market blind spot?

Africa: high optimism, low investment

Those who invest in Africa are firmly optimistic, with the continent more likely than any other region to see increased investment from those already investing there (93 per cent).However, with just 3 per cent of the panel’s AUM, Africa is the continent with the lowest levels of investment.Almost three in five investors (59 per cent) said that they are deterred by a lack of in-house specialist teams, although this was less of a problem for the 10 largest firms (28 per cent).Concerns about low returns may be another factor. More than half of the panel (53 per cent) view returns from investment in the region as low or extremely low.However, these perceptions don’t always align with reality. Among those who already invest in Africa, 54 per cent say that their African emerging market investments have performed as well as – or better than – their developed market investments over the past three years.