Alive and Well: The Equity Cult in Emerging Markets

- Equities v. Bonds — "A recent CIRA Global Strategy report described the collapse of the ‘cult of the equity’ in global markets and the rise of the ‘cult of the bond’ in recent years. The process of de-equitization is a key symbol of these trends. Deequitization means the shrinkage of equity markets, via cash-financed M&A and share buybacks, alongside limited IPO activity. Market cap falls."
- Alive and Well — "The exception to the de-equitization trend is the emerging markets. The weight of GEMs in MSCI ACWorld has risen from 3.8% in June 2002 to 13.1% at end-August. Price performance alone would have lifted this weight to 9%; the rest is explained by the relative pace of equitization/de-equitization in emerging versus developed markets over this period."
- The Evidence — "The ongoing equitization process in emerging markets is shown by: i) strong flows into GEM equity funds ($40bn in 2010, a year of virtually flat markets); ii) rising equity weights in GEM pension fund assets; iii) a structure of bond v. equity yields that does not encourage the retirement of equity; and iv) heavy IPO activity and secondary issuance."
- Q4 Rally — "The ongoing appetite for equities in emerging markets should help to fuel a strong fourth quarter in EM equities. The trading range in MSCI GEMs, in place for several months now, looks set to break at any moment. Ample liquidity, reduced fears of a US ‘double-dip’, favorable seasonals, a rally in the US market and attractive valuations should trigger a Q4 rally in emerging markets."


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