Superannuation funds should double their exposure to emerging markets over the next 18 months, as developed economies are facing decades of low growth, according to Investec global strategist Michael Power.
"I think you should probably be redoubling your efforts in emerging markets, because the problems in the West are secular, they are not cyclical," Power said during a presentation at the Australian Superannuation Investment Conference on the Gold Coast yesterday.
"Yes, there has been a relative slowdown in emerging markets, but I think it is going to become increasingly obvious that the western monetary parties are bankrupt of ideas and that they are truly facing a Japanisation on an extraordinary scale."
Power referred to the idea the western world might experience a prolonged period of sluggish growth and low interest rates as it tried to work through the large amounts of debt, in a similar fashion to what Japan had experienced in the past 15 years.
The recent slowdown of emerging market economies provided a good entry point for investors, he said.
"I think this is the time that you need to look at these considerations. It doesn't mean you have to jump tomorrow, but I do suspect that at some time in the next 18 months you need to redouble your exposure," he said.
But super fund executives were somewhat sceptical about increasing their allocation to emerging markets.
"A lot of the Australian pension funds already have a significant exposure to emerging markets," Hostplus chief executive David Elia said.
"With the slowdown going on in Europe and, therefore, the demand for emerging markets products declining ... I'm just wondering if the Australian funds should be reconsidering their allocations to emerging markets in the context of where they are today?
"You can add to that the exposure to the resources companies here in Australia, which are already feeling some of the pain of the slowdown of emerging markets."
AllianceBernstein senior portfolio manager Morgan Harting said it was likely emerging market returns were going to be lower in coming years than they had been in the past decade.
"I think all investors need to adjust their expectations of returns for both equity and debt down, partly because of these slower growth prospects. Growth will be slower in emerging markets than it has been," Harting said.
AllianceBernstein has forecast emerging market equities will return around 10 per cent a year over the next decade, while emerging market bonds are likely to return 4.5 per cent a year over this period.
But Harting said he agreed with Power that the developed world economies would do worse.
"The alternatives are not terribly attractive," he said.
