Institutional buy-side investors see the emerging financial markets as a source of ongoing positive returns as developed markets continue to show slower growth and increased risks.
But according to TABB Group in new research published today, prime brokers hold the key to the hardest-to-access markets based on their ability to provide cost-efficient access products as well as technology platforms, including direct markets access systems and cross-region, cross-asset portfolio management tools.
Emerging-market investors are now utilizing both company- and sector-based strategies rather than macro country strategies, says Kevin McPartland, author of the new TABB Group report, The Emerging Market Resurgence: Access, Risk and Reward, leading to demand for swaps and other access products.
Swaps, participation notes and other similar access structures can offer institutional buy-side investors more well-rounded investment opportunities than exchange-traded funds and depository receipts which provide less flexibility, McPartland says. Continued growth in these broad-based, emerging-market ETFs will come largely from retail investors.
TABB Group believes that emerging-market groupings such as the BRIC countriesBrazil, Russia, India and Chinaand the CIVETSColumbia, Indonesia, Vietnam, Egypt, Turkey and South Africawill continue to lose relevance, as similar economic growth patterns for each country do not equate to similar investment opportunities.
However, McPartland notes the rise of the CIVETS nations, saying its time for the BRIC countries to move over as the CIVETS are the next wave of emerging financial markets with prospects on par with what the BRIC nations began to experience a decade ago. He adds that the newly christened CIVETS countries saw inflows of $10 billion in 2010 and nearly every one of the CIVETS posted double-digit equity returns.
For institutional investors, easy, open access to these individual markets can be more critical than each countrys economic growth prospects. Global prime brokers, McPartland says, are important for both providing products that offer market access and ensuring clients are aware of ever-changing local regulatory policies.
These brokers can open doors to new buy-side clients with investment ideas, he says. Its their ability to create cost-effective and efficient products, however, that can provide the necessary exposure and differentiates them from competing brokers.
The new report also addresses Basel III and proposed tax changes in that they may negatively impact further investment in emerging markets.
Global derivatives reform will be a positive step and will drive the availability of access products, some of which will move to a centrally cleared environment, says McPartland.
(CM)