A world undergoing structural change cannot easily be classified into neat categories like “developed” or “emerging,” points out Rockefeller Financial in its latest Global Foresight report. This requires thinking that is opportunity-focused, and “unconstrained by national boundaries,” the firm says.

A little over a decade ago, MSCI reclassified Greece as a developed market; now, its status stands in question, and reports indicate it may be downgraded to an emerging market in an “unprecedented” move, writes the firm’s chief investment officer, David Harris.

This highlights three things: first, that Europe is the biggest source of global risk; secondly, that dislocations are occurring as the burden of global growth shifts to the emerging world; and finally, the difficulty of categorising countries at such a time.

Emerging markets now account for nearly 12 per cent of world equity markets and, by some estimates, 40 per cent of world economic output. Within emerging markets, the “BRIC” markets reflect only 38 per cent of equity market opportunities, while adding South Korea and South Africa would bring this up to 60 per cent, the report points out.

“In aggregate, emerging markets are now selling for 10 times earnings after having averaged 15 times for the last ten years. Therefore, we believe the growing pains they are going through are largely priced in the market,” writes Harris.

“Questionable” policy actions

However, according to Rockefeller, a number of emerging markets are implementing policies that are “questionable.” First on the list is Argentina, due to the privatisation of Yacimientos Petroliferos Fiscale. Brazil also features owing to the $10 billion fine against Chevron after an oil spill of 3,000 barrels.

Meanwhile India “should be a long-term source of opportunity for efficient companies and retailers, but India’s policies are making it difficult,” the outlook says. As an example, foreign direct investment peaked in 2008 at $42.6 billion and has since shrunk dramatically to $24.6 billion in 2010.

The euro’s bright spots

On the other hand, the euro’s newest member, Estonia, managed its way remarkably through the financial crisis of 2008-09 and has “slashed spending and wages” to stay competitive whilst pegging its currency to the euro as part of the admission process, says Harris.

“As often as it is stated that Greece could fix its economy if not shackled to the euro, we view Estonia as evidence that restructuring can occur with the eurozone,” says the outlook, although noting that such change is politically easier in an “up-and-coming” country.  

Estonia also has an entrepreneurial culture, boasting companies like Skype, as well as engineering and technology startups.

Asia: the "primary driver"

“East Asia has been and will need to be the primary driver of emerging market growth,” says Rockefeller’s outlook - and the region is of course home to China, the world’s largest emerging economy by far. While its stock market is only the third largest in the emerging world, its economy is equal to that of Brazil, Russia, India and Mexico combined.

“Twenty years ago, China accounted for less than 1 per cent of Brazil’s exports. Today, it makes up approximately 15 per cent,” writes Harris.

Meanwhile, in terms of equity market size, South Korea tops the list of emerging markets. As Rockefeller points out, with a history of corporate governance issues that have weighed on equity prices, the country is one of the cheapest equity markets in the world – one of the reasons it remains “emerging.”

Clouds on the horizon

While the company views emerging markets as broadly having their “growing pains” priced in, it points out there are areas to watch. First and foremost, they “have lost steam so far this decade,” writes senior portfolio manager Jimmy Chang. Particularly, China has lowered its real GDP growth target from 8 per cent to 7.5 per cent.

This raises a question over the so-called “commodity super-cycle” and the countries that have grown off the back of it. As Chang writes, “One has to ask who will pick up the slack should China’s appetite for base metals starts to wane.”

Truly global investment

This complex and globally-connected picture presents many hurdles, but Rockefeller says one thing to emerge clearly from it is that investors need to start thinking in terms of opportunity – not emerging versus developed, or US versus international, for example. Going forward, investors will need to examine opportunities with thinking that is “unconstrained by national boundaries.”