(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Agnes T. Crane
NEW YORK, March 26 (Reuters Breakingviews) - Over-eager
pension funds may end up harming the emerging markets golden
goose. U.S. retirement managers are struggling to find decent
returns, leading many to stretch into riskier areas like
emerging markets. But a pension-fueled shift of hundreds of
billions of dollars of new cash into the asset class could prove
self-defeating and squeeze out whatever extra yield remains.
The prevailing low-yield environment is particularly painful
for pension funds that are on the hook to pay out retirement
benefits at preset levels no matter what. Many still figure
their likely annual returns at approaching 8 percent on average.
With benchmark yields on, say, 10-year U.S. government debt
hovering around 2 percent against a 50-year average nearer 7
percent, that target is currently optimistic.
Emerging markets look a tempting alternative. Not only have
they delivered double-digit returns for investors in most of the
last 10 years, but Barclays expects emerging economies including
China, Brazil and Turkey to grow at 5.3 percent on average this
year, more than five times as fast as the developing world.
Asset manager BlackRock says pension managers and insurance
companies could more than double their emerging market
allocations, which currently stand at about 4 percent of their
global portfolios on average. The problem is that a flood of new
capital could easily wash out the benefit.
A 4 percentage point increase in all large institutions'
allocation to emerging markets would be worth some $2.2
trillion, according to BlackRock. That’s equal to about a
quarter of the entire emerging market debt universe, as measured
by Schroders. A similar move by U.S. pension funds alone would
send $680 billion to the developing world, or more than six
times the amount investors plowed into emerging market equity
and bond mutual funds last year, according to EPFR Global. Even
that has already squeezed returns. Emerging market sovereign
debt is expected to return only 4 percent this year while
riskier local currency bonds could yield 7 percent, according to
The wall of new money could inflate another bubble in
developing markets. Credit in Turkey, Indonesia, Brazil and
Thailand was already showing signs of overheating in 2012,
according to the Bank for International Settlements. U.S pension
funds may find emerging markets less fertile than they hope.
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- U.S. pension plans and insurance companies have less than
4 percent of their assets in emerging markets, according to
BlackRock, though many of them are considering an increase to 8
percent. A 4 percentage point change by U.S. retirement funds
would increase inflows by $680 billion, according to the asset
- Emerging market equity and bond mutual funds received $110
billion in new funds in 2012, according to EPFR Global. In 2013,
investment in local currency bonds is more than double that of
foreign currency debt.
- Bank for International Settlements paper: link.reuters.com/ryt86t
Backs to the future [ID:nL1N0AS8RT]
Savers losing [ID:nL2E8IH3ER]
- For previous columns by the author, Reuters customers can
click on [CRANE/]
(Editing by Richard Beales and Martin Langfield)
Keywords: BREAKINGVIEWS EMERGING/PENSIONS
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