Emerging and frontier market stocks are worth investing in, said industry experts at Benefits Canada’s Benefits & Pension Summit in Toronto on Monday.
Mathieu Tanguay, a partner and investment consulting leader for central Canada with Mercer, gave five reasons for investing in emerging markets: favourable demographics; greater potential for productivity gains; greater fiscal strength and lower government debt; portfolio diversification; and attractive price-to-earnings ratios in equity markets and yields in bond markets.
Read: 4 emerging markets trends
He also made the case for an active management approach, noting that emerging markets are still relatively inefficient to developed markets.
Tanguay recommends if a pension plan is considering investing in emerging markets, it should consider a specialist emerging market manager as they’re more likely to follow more stocks, especially small- and mid-cap equities.
Asha Mehta, a senior vice-president and portfolio manager with Acadian Asset Management, talked about the opportunities of investing in frontier markets, a subset of emerging markets.
She noted that frontier markets represent about 17% of the world’s population and 9% of GDP. However, frontier stocks comprise 1% of the world’s equity market capitalization.
Read: Investing in emerging market equities
Frontier markets are growing faster than emerging markets and eight out of the top 10 growing economies are frontier markets, Mehta explained.
She said telecom companies in frontier markets are more like consumer stocks whereas they’re defensive stocks in developed markets, noting that there are more cellphone customers in Sub-Saharan Africa than there are in North America.
Read: Investing in frontier markets
Mehta added that frontier market stocks have lower valuations than both developed and emerging markets. And frontier market equities also have higher yields (3.7%) compared to 2.6% and 2.3% in developed and emerging markets, respectively. Also, frontier markets are also less volatile than emerging markets. Those factors, she said, make frontier market stocks a compelling investment opportunity.
All the articles from the event can be found in our special section: 2015 Benefits & Pension Summit Coverage.