Adia chief says exposure to emerging markets necessary

Abu Dhabi:

Broad exposure to emerging markets is necessary for large global portfolios that seek sustained real returns on capital, Shaikh Hamed Bin Zayed Al Nahyan, Abu Dhabi Investment Authority (Adia)’s managing director said in a letter quoted in 2012 Abu Dhabi Investment Authority (Adia) Review. The review was released yesterday.

“As we enter 2013, the landscape looks much as it has for several years. Many developed market economies are struggling with the effects and consequences of the global financial crisis. It has become clear that the challenges of unemployment, fiscal reform and deleveraging will persist for some time,” Shaikh Hamed said.

“Markets now expect near-zero policy rates in major economies to last for longer than expected last year. This environment may not inspire great enthusiasm, but would seem largely priced into financial markets and as we saw last year, does not preclude good investment outcomes. Economic leadership is passing to emerging markets, not just as their weight in the global economy passes 50 per cent, but as their share of likely future global growth moves far higher. Not every year will be as favourable to investors as 2012 was, but we believe, the future remains positive,” he added.

Shaikh Hamed said last year both the Federal Reserve and the Bank of England rolled out new policy tools to combat sluggish economic recoveries. In Japan, the new government promised more aggressive efforts to fight deflation and renewed recession, while authorities in China demonstrated their willingness to support a slowing economy.

“A further positive development last year was the continued demonstration of the power of technology to change how one views the future. As an example, while the importance of the shale gas revolution has been evident for several years, it finally emerged as a significant factor driving economic forecasts and in generating a greater sense of optimism about prospects for the US and other economies,” he added.

Shaikh Hamed said market outcomes of 2012 demonstrated the value of maintaining confidence in a long-term vision of economic progress, and the ability of political and economic actors to address problems effectively.

Adia said in the 2012 review “looking forward, we expect equities to remain attractive on a relative basis as bond yields hover at historically low levels and investors look to deploy some of their significant cash reserves.”

Adia said even against a backdrop of subdued economic activity, valuations in general remain attractive on a historical basis, with the yield on equities spreading positively over the yield on government bonds.

“The positive economic fundamentals underpinning emerging markets also remain intact and should result in long-term outperformance against developed markets, although performance will also likely remain volatile, especially during major global setbacks,” it added.