They saw the volatility coming.
In a survey of 200 asset owners late last summer — ahead of equity markets’ fourth quarter free fall — 81 percent predicted that stock volatility would increase “substantially” over the next 12 months.
As a result, roughly half believed that returns from equity market indexes would be substantially lower in the coming year, according to a new report from State Street Global Advisors, which partnered with Institutional Investor to conduct the survey.
According to the report — the second of two based on the survey findings — pension funds, endowments, foundations, and other asset owners are now turning to emerging markets in search of returns. Eighty-four percent said their funds would benefit from higher exposures to the asset class, which was seen as relatively cheaper compared to stock markets in the U.S. and other developing markets.
Many are already moving in: As detailed in State Street’s first report on the survey findings in April, 75 percent of respondents had planned to increase their allocations to emerging market equities over the following two years. Just 1 percent said they would downsize their exposure.
“There’s more consensus that emerging markets are going to help investors get returns in the future,” said Olivia Engel, CIO of active quantitative equity strategies at SSGA.
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In an interview with II, Engel explained that investors view emerging markets as being better positioned for growth over the long-term, in addition to having more attractive valuations. In the time since the survey was conducted last summer, Engel said State Street clients have not changed their minds on emerging markets, sticking to planned allocation changes despite the sell-off at the end of last year and recent heightening of trade tensions.
“We’ve continued to see client interest in emerging markets,” she said. “That hasn’t slowed down or changed.”
Improving the case for emerging markets, according to Engel, is the increasing availability of alternative data, as well as analysis based on environmental, social, and governance factors. Although corporate governance issues and lack of quality performance information have been seen as barriers to investing in emerging market equities, the survey results indicated that that perception is now changing.
“The increase in information available and increasing amount of research that’s done on issues of corporate governance are going to be useful in evaluating that asset class,” Engel said.
In particular, survey respondents indicated that they believed that ESG research offered valuable insights to investors seeking to outperform — in both emerging and developed markets.
“The majority think that ESG is absolutely giving them an information advantage when it comes to evaluating stocks,” Engel said. “Not as an ethical choice or out of a do-good desire, but a way to outperform the market.”