Emerging markets have long been the domain of investors willing to take risks. But in a reversal of fortunes brought on by the crises in Europe and the United States, they are now being sold as bastions of safety and stability.
It is the latest sign of how the world has been turned upside down by the sovereign debt problems in Europe and a slumping U.S. economy that is showing few signs of rebounding.
Asset managers are increasingly turning to countries throughout Asia and South America – not for high growth, as they would have a decade ago, but as a source of steady, predictable returns. Lack of clarity in some of the world's most developed economies has made those markets too unpredictable.
"Where they are turning is the place in the world where balance sheets are still safe. And that's largely emerging markets," said Mark Poole, chief investment officer at U.K.-based Blue Bay Asset Management.
Mr. Poole said the firm has found itself increasingly advising its most conservative clients to bulk up their emerging-market holdings at a time of comparative upheaval elsewhere.
"It's a dramatic transformation of everything that investors have been assuming for the last 20 or 30 years," Mr. Poole said.
More than just stocking up on government bonds, Blue Bay, which is owned by RBC Asset Management Inc., is advising ultra-conservative clients such as pension funds and other institutional investors that buying corporate debt in some burgeoning markets will provide a more attractive haven – and more dependable returns – than in developed countries where they would traditionally park their funds.
Countries like Brazil, which were once on shaky political ground, have unexpectedly blossomed into stable incubators for growth, while countries like China are enjoying low debt at a time when much of the world is perilously leveraged, which will feed its growth.
With sounder credit metrics and attractive spreads compared to U.S. Treasuries, countries like Indonesia, Brazil and Russia are increasingly getting attention from conservative asset managers.
Countries with lower debt compared to their gross domestic product are seen as having better prospects for growth, rather than being consigned to belt-tightening. According to the Organization for Economic Co-operation and Development, China has a remarkably low debt-to-GDP ratio of 19 per cent, along with Indonesia (27 per cent) and South Korea (32 per cent).
Brazil's ratio sits at 67 per cent, while India is at slightly less than 72 per cent. While not low, both of those countries are below Canada at 82 per cent and the United States at 93 per cent. Russia is carrying unusually low debt, at 11 per cent, but part of that is a function of its default more than a decade ago.
Paul Mesburis at Excel Funds Management Inc. has seen a similar trend in terms of emerging markets providing more stability. The Mississauga-based asset manager specializes in emerging-market investments. Its India investment fund has returned 287 per cent over the past decade, more than double what the benchmark TSX index has returned, he said.
His firm is attracted to markets in China, India and Latin America. It's particularly keen on Brazil, where the country's Bovespa index is up 7 per cent in the past year compared to the S&P 500, which is flat, and the S&P/TSX index, which has returned around 1 per cent in that time.
Peru's benchmark index is up more than 24 per cent, while Chile's has risen 18 per cent. Beyond South America, the Taiwan Taiex index is up 13 per cent while Russia's benchmark index has risen 12 per cent, and the Shanghai composite has gained just over 10 per cent.
Conservative investors have always had valid reasons for not venturing into up-and-coming markets, from worries about political and economic instability to high sovereign debt levels and concerns over weak regulatory oversight, such as the accounting scandals that have engulfed Chinese companies like Sino-Forest. And emerging markets in Eastern Europe are being looked upon with some concern due to fears about the possible contagion from a default in Greece.
"We're staying away from some of the smaller more illiquid markets – parts of Africa for example, where we don't believe the capital markets have evolved sufficiently," Mr. Mesburis said. Excel is cautious on Mexico right now though, mostly because of anxiety surrounding the U.S.
"Is the U.S. set up for low growth? Without a doubt. We believe Mexico will suffer as a result."
Asset managers are spending a lot of time these days figuring out what this new world order means in terms of where to put money.
"We have this debate every day: What's an emerging market?" Mr. Poole said. "Some of the emerging countries we invest in are double-A-rated these days and possess much stronger dynamics than the developed world. And given the trajectory of economic performance and of credit metrics, what is an emerging market and what is a developed market is becoming less clear."