Emerging Economies to Counter Big Chill in Returns, Norfund Says

Institutional investors should look to emerging markets to avoid a toxic combination of falling financial returns and higher political risk in the developed stock and bond markets.

While pension and sovereign wealth funds are struggling with weak returns in OECD markets, opportunities can be found in infrastructure, private equity and unlisted assets in developing economies, according to a report by Re-Define, commissioned by the Norwegian Investment Fund for Developing Countries, or Norfund.

“Matching capital from developed economy institutional investors with these large and promising investment opportunities in developing economies is a marriage made in heaven,” Sony Kapoor, a former fellow at London School of Economics and visiting scholar at the IMF, said in the report.

Institutional investors have locked in about 80 percent of their assets in low returns for high and rising risk, according to Kapoor. More favorable macroeconomic conditions across developing countries where growth rates have been two to three times higher than those seen in OECD economies may offer lower risk, he wrote.

“Perhaps the biggest advantage of such assets is that unlike listed securities, which QE and excess liquidity in the system have turned into crowded trades, many unlisted opportunities can still only be accessed by long-term investors with human capacity,” Kapoor said.

The Norwegian sovereign wealth fund, the world’s biggest, is seeking to expand its investment universe into unlisted infrastructure investments to take advantage of its size. That has so far been stymied by a Finance Ministry that sees unlisted infrastructure as taking on too much of a political risk.

With serious structural reforms, a more stable political and policy environment, many developing countries provide a safer investment climate while increasing foreign exchange reserves are cutting emerging economy vulnerability to external shocks, according to Kapoor.

That provides a clear opportunity for large funds, such as Norway’s, that are able to adapt their organizations to breaking new ground.

“It’s the world’s largest fund, so they should have enough time and money to develop capacity in new markets,” he said.

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