Last week markets were rocked by more fears of sovereign debt defaults in Europe as pundits started making widely covered comparisons between Greece and the final days of Lehman Brothers during the run-up to the financial crisis. While we may or may not be dealing with a Lehman moment, many believe we are about to see the end of the Euro and that the EU has no other option than to unravel – cue even more uncertainty in the Euro zone.
Little wonder that more plan sponsors are continuing their search for growth opportunities beyond debt-laden developed economies in North America and Europe—in fact, countries like Brazil and Chile are getting a lot of attention from institutional investors right now. Amidst all the bad news about Europe and the US, it was easy to miss the good news coming out of Brazil—Standard and Poor’s raised their outlook on the country from stable to positive.
For plan sponsors, however, one big barrier remains when it comes to a lot of emerging markets – access. Pension funds have to worry about both market impact and capacity. Investing large sums in a small market can have a negative impact—and depending on what kind of exposure a plan wants (i.e., infrastructure or real estate) it can take a long time to find or structure the right deals. In the meantime, they might miss out on some of the growth.
Plans can choose to manage their first move into emerging markets with swaps—or they can use country-specific ETFs to gain short-term exposure to the markets they want to invest in. ETFs don’t involve counterparty risk and they offer the same easy, liquid access that swaps offer. Sure, you still face issues of market impact—but if you structure it right, a plan should be able to get in easily through ETFs.
And in today’s crazy markets, liquidity is paramount.