Speaking at a briefing in Sydney yesterday, New-York based Lazard Asset Management portfolio manager Rohit Chopra laid out three scenarios for economic growth and the ramifications for emerging market equities.
In an environment in which a global recession is expected to occur, emerging market equities will underperform as investors undertake a "flight to safety", said Mr Chopra.
But a global recession is an unlikely scenario, he added.
"Monetary policy around the world continues to be constructive and central banks will do what is necessary to make sure the global economy is still standing on its two feet," Mr Chopra said.
The other extreme is that there will be a "very strong" return to global growth, he said.
In this scenario, emerging markets will actually underperform in the near term, Mr Chopra said.
"We believe that an environment of global growth inflation will start to creep up first in emerging markets. So as a result, monetary policy in emerging markets will have to become initially more restricted compared to more developed markets," he said.
Lazard AM's 'base case' scenario of moderate economic growth is the sweet spot for emerging market equities, Mr Chopra said.
"In this environment we see a continued deleveraging in the developed economy, with emerging economies growing at relatively healthy rates," he said.
But emerging market growth will be between three and seven per cent rather than the 10 per cent levels seen in 2007, Mr Chopra said.
"In addition, because during this period monetary policy will be accommodative, emerging market companies will have access to capital," he said.
"We believe emerging market companies are trading at sizable discounts to the developed markets and having high levels of profitability.
"We should start to see emerging market companies outperform their developed market counterparts," he said.
