Investing June 20, 2017

Investors Urged to Reconsider Emerging Market Investing

PGIM says a one-size-fits-all classification of emerging markets will become obsolete.
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Emerging markets will collectively drive global growth over the next decade, but investors would be wise to reconsider how they approach these markets, according to PGIM, the global investment management businesses of Prudential Financial, Inc.

Increasingly, says PGIM, emerging markets will be the masters of their own economic fate, making a one-size-fits-all classification of emerging markets obsolete.

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In a white paper, “Emerging Markets at the Crossroads,” PGIM argues the export-led, externally oriented growth model that propelled emerging markets forward since the 1980s has stalled. As aging populations reduce the long-term growth potential of developed markets, and the backlash against globalization and free trade continues, emerging markets will increasingly choose their own individual paths.

“Gone is the rising developed market tide that lifted all boats,” the firm says. Therefore, PGIM urges investors to embrace an active, locally informed investment approach that positions their portfolios for emerging market divergence, and takes advantage of the opportunities from the increasing resilience and declining contagion risk across many emerging markets. 

“We believe the opportunity will increasingly be to capture the alpha of outperforming emerging market sectors, themes and securities rather than chasing the beta of the broad emerging markets universe,” says Taimur Hyat, chief strategy officer, PGIM. “This requires building portfolios from the bottom up—the historical emerging market equity investing approach of rotating exposures to countries will no longer be adequate.”

NEXT: Themes underpinning emerging market investing going forward

Emerging market investors will need to focus on the cross-cutting themes, sectors and securities that drive investment returns, PGIM says.

PGIM calls attention to three themes that will underpin emerging market investment opportunities going forward:

  • Leapfrogging into the digital era: The rapid adoption of fintech, e-commerce and the distributional logistics necessary for e-commerce to thrive, represent attractive avenues for investing in emerging markets;
  • Intra-emerging market trade and domestic opportunities from the rising urban middle class: The rapidly growing middle class in emerging markets is increasingly urban, aspirational, connected and wealthy. This new wave of consumers will create investment opportunities linked to intra-emerging market trade, as well as more domestically focused opportunities in retail real estate, consumer durables, health care and pharmaceuticals, and the leisure and recreation sectors; and
  • Structural transitions in local bond markets, real estate and infrastructure as emerging markets modernize their economies: As domestic capital markets deepen, local bond markets will mature, potentially extending into local government and securitized debt opportunities. In parallel, there will be new opportunities for investors as the real estate sector formalizes and as governments seek long-term private capital to close the massive infrastructure gap.                                                    

“Navigating the risks and participating in the opportunities offered by this new emerging market order will be an increasingly important driver of portfolio returns in a world where developed markets are likely to offer diminished yields and subdued growth prospects over the long term,” Hyat says. “We believe investors who act soon will reap the greatest rewards, for as emerging markets continue to close the economic gap with developed markets, the unique investment opportunities they afford will become increasingly scarce.”

Participants June 20, 2017

Millennials Long for Financial Education

Several Millennial respondents to a recent survey by Pentegra reported that they could have benefited from learning about saving for retirement as early as middle school.

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Even though most Millennials (81.37%) are saving for retirement, a new study by Pentegra finds that many are in desperate need for guidance on how to develop good spending habits and saving strategies.

According to the survey, 45.1% of Millennials are contributing less than 5% of their annual salary or what the firm calls an “inadequate level” into a retirement savings plan. Meanwhile, 18% aren’t contributing anything toward retirement. For many, conflicting financial priorities including rent, mortgage and student loan bills are establishing major barriers to funding retirement.

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StudentLoanHero reports that the United States student loan debt stands at $1.44 trillion at the hands of 44.2 million Americans. The average monthly student loan bill for a borrower between the ages of 20 and 30 is $351. The Citizen Financial Group reports that college graduates under the age of 35 are spending nearly a fifth of their income on paying off their student loans.

But the Pentegra study also found that spending on “wants” in relation to “needs” is also impeding building up savings. The report found that 31.38% of respondents spent at least $75 a week on eating out including purchasing coffee. Pentegra noted that if a person spends $5 on a cup of gourmet coffee five days a week, the annual price tag for coffee alone is $1,300. In 40 years of active work, this cost jumps to $52,000. And assuming a 6% compound annual growth rate, it ends up at $152,000.

One survey respondent who is a middle school teacher in Tampa, Florida said, “A lot of people my age, including some of my friends, find it easy to spend what they have when they get it. Retirement for a person my age is years and years away. It seems hard to plan for developments that are 40 years down the road.”

That sentiment was shared by a lot of respondents, highlighting the need for plan sponsors and employers to stress the importance of retirement saving and the value of contributing as early as possible.

One respondent noted, “If we educate new employees that have never had a 401(k) account, then maybe they will see the importance of what it’s really there for. At my first job that offered a 401(k), I didn’t contribute, the reason being I didn’t know what it was for and the benefits of it.”

Still, many chimed in that they could have benefited from learning more about retirement saving before they even stepped through the door of their first job. “People my age don’t know about saving for retirement,” said a marketing coordinator at a financial services firm in Shelton, Connecticut. “In high school we never heard anything about it. Nor was the subject of retirement discussed in college … They should probably start teaching it in high school, if not earlier – even junior high would make sense to me. They don’t talk about personal budgets or explain compounding interest, or any of that. Addressing how you need to be actively saving for 40 years is something all public schools should be doing.”

And if the American public school system does move forward with an emphasis on financial wellness, employer efforts to promote good spending and saving habits among their workforce could provide an added benefit. One social worker from Shelton, Connecticut, reflected “I attended a meeting with the bank that manages our 401(k) at work. I discussed with my family what percentage would be appropriate to have taken out of my check bi-weekly toward my 401(k), and I’ve been able to change the percentage as my salary increases.”

Small businesses can also benefit from entering the 401(k) space sooner than later. The Pentegra report found that 78.43% of respondents said they look for companies that offer retirement benefits when job hunting. However, the U.S. Census Bureau reports that only 14% of employers offer a tax-deferred retirement plan and most are large companies.

Pentegra stresses that “While most large companies offer a 401(k) with an employer match and/or other retirement plans, this should serve as a wake-up call for smaller firms that may be undersupplying—or not offering at all—some kind of retirement benefit plan.”

The firm believes that key players in the industry can address the negative aspects of Millennial savings and spending habits along with perceptions of retirement by taking certain steps. These include encouraging conversations about saving for retirement with family, friends and peers; improving economic education at schools; encouraging young people to delay instant gratification; and redoubling efforts at educating employees.

The Pentegra Millennial Saving Survey was conducted by interviewing more than 100 people born between 1980 and 2000 during May 2017. The full report can be found at Pentegra.com. 

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