We are pretty optimistic that emerging market equity returns will be positive over 2011, but we expect them to underperform developed market equities. The attractions of global equity markets next year are underpinned by a relatively high risk premium against fixed income instruments and by the improving prospects for the US economy, driven by QE2 and by the ongoing improvements in productivity.
Look specifically at emerging markets and they are also cheap against fixed income, but they are valued at close to parity with their developed market peers, having traded at a discount for much of the previous decade. We feel that they should trade at a discount again, for three reasons.
First, whilst corporate governance has improved over recent years, minority shareholders still lack any real influence in most emerging markets, albeit with some exceptions such as South Africa.
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