BOSTON and TORONTO, June 1, 2015 /CNW/ -- Capital markets in emerging economies have remained significantly underdeveloped relative to their powerhouse underlying economies, but will likely experience profound shifts over the next 15 years, with implications for debt and equity investors, according to a new report from Manulife Asset Management.
"The Changing Shape of Capital Markets in Emerging Economies," a collaboration by Kathryn Langbridge, Head of Emerging Markets Equities, and Paolo Valle, Co-Head of Emerging Markets Debt, is now available at www.manulifeam.com.
The balance of global economic power, the authors note, has shifted toward emerging economies, with these nations combined now accounting for 51 percent of global output on a purchasing power parity basis. However, emerging markets account for only 22 percent of total global equity market capitalization and just 14 percent of both corporate and sovereign bond market value, respectively. This relatively stunted capital market growth is evolving fast, and the new Manulife Asset Management report looks at ways investors may take advantage of the secular trends likely to dominate emerging market investing in the years ahead.
The report notes that on the supply side, increased political momentum behind structural reform and market liberalization measures in countries such as China are expected to lead to deeper capital markets in many emerging countries. This is likely to coincide with a massive increase in demand as household and government savings pools in these nations institutionalize. As a result, the authors write: "We anticipate significant changes in the composition of emerging market indices over the next 15 years, reflecting these and other dynamics."
China is a case in point in the report. Within emerging market economies, household and institutional equity ownership is structurally low. For example, while more than 50 percent household wealth in the U.S. is held in the stock market, China, with a savings rate of 47 percent has a stock market participation level of only 6.5 percent. But markets there are liberalizing, with the launch of the Shanghai-Hong Kong Stock Connect program at the end of 2014 a landmark event in the path towards the global integration of China's capital markets, by immediately enabling direct foreign access to its domestic equity market. Further steps include the phased inclusion of China's domestic A-shares in MSCI global benchmarks over the next year or so and the inclusion this year of US-listed Chinese ADRs in the China country and emerging markets global index.
Changes to the Chinese stock market index are also likely to have an impact. For example, the weighting of so-called 'New China' – the new service sector economy in China – is expected to double to become nearly a third of the index. Taken together, changes should result in an index that is more representative of the country's economic changes from the end of 2014. It is likely that this will have an immediate impact in terms of investment flows – as the changes in index composition are likely to make the market more attractive to foreign investors – with potential implications for the size of China in the overall index.
"The increasing integration of world markets is likely to bring greater coordination, better governance, more liquidity and ultimately, lower funding costs for emerging companies," the authors write in conclusion. Unprecedented demand lies ahead as the rapid growth of savings pools meets the rapid opening and liberalization of capital structures in emerging markets. While shorter term headwinds undoubtedly contribute to emerging debt and equity market volatility, secular and structural changes create an ever more compelling case for inclusion of emerging market asset classes in long term portfolios.
About Manulife Asset Management
Manulife Asset Management is the global asset management arm of Manulife, providing comprehensive asset management solutions for investors. This investment expertise extends across a broad range of public and private asset classes, as well as asset allocation solutions. As at March 31, 2015, assets under management for Manulife Asset Management were approximately C$383 billion (US$302 billion).
Manulife Asset Management's public markets units have investment expertise across a broad range of asset classes including public equity and fixed income, and asset allocation strategies. Offices with full investment capabilities are located in the United States, Canada, the United Kingdom, Japan, Hong Kong, Singapore, Taiwan, Indonesia, Thailand, Vietnam, Malaysia, and the Philippines. In addition, Manulife Asset Management has a joint venture asset management business in China, Manulife TEDA. The public markets units of Manulife Asset Management also provide investment management services to affiliates' retail clients through product offerings of Manulife and John Hancock. John Hancock Asset Management and Declaration Management and Research are units of Manulife Asset Management.
Additional information about Manulife Asset Management may be found at ManulifeAM.com.
Manulife is a leading Canada-based financial services group with principal operations in Asia, Canada and the United States. We operate as John Hancock in the U.S. and as Manulife in other parts of the world. We provide strong, reliable, trustworthy and forward-thinking solutions for our customers' significant financial decisions. Our international network of employees, agents and distribution partners offers financial protection and wealth management products and services to millions of clients. We also provide asset management services to institutional customers. Assets under management by Manulife and its subsidiaries were approximately C$821 billion (US$648 billion) as at March 31, 2015.
Manulife Financial Corporation trades as 'MFC' on the TSX, NYSE and PSE, and under '945' on the SEHK. Manulife can be found on the Internet at manulife.com
SOURCE Manulife Asset Management
For further information: Beth McGoldrick, Beth_mcgoldrick@manulifeam.com, (617) 663-4751, http://www.manulifeam.com