Speaking at a media presentation in Sydney yesterday, Dr Power said investors should be looking to make a strategic allocation towards manufactured goods exporters in East Asia running current account surpluses.
Dr Power said this group of countries presents the strongest opportunity for emerging market investors.
“The characteristics of this bloc tend to reduce the risk profile in all asset classes in that they tend to create a less volatile economic environment,” he said.
In terms of the other emerging markets, which he divided into commodity exporters with current account deficits and commodity exporters with either current account deficits or surpluses, he said investors should take a tactical approach only.
Dr Power said several sovereign funds have already adopted this type of approach.
The countries experiencing current account deficits are closely tied to global liquidity, he said, while the prosperity of the commodity exporters is linked to the commodity cycle.
“For instance, 2011 saw the high tide for commodities coincide with strong liquidity flows from quantitative easing,” Dr Power said.
Any emerging market country that is running a deficit will be hurt by a change in liquidity, he said.
“It’s much better to be on the other side of the equation, running an account surplus, not having to worry about funding your external account, raising your interest rates and imported inflation,” he said.
“If you’re [running a current account deficit] you’re very dependent on the US dollar because it’s the world’s reserve currency and it fills the gap of your external account.”
