A new analysis from Cerulli Associates finds equity markets have rallied since the recent financial crisis, helped in part by quantitative easing and monetary policy actions by central banks worldwide.

Asset prices have responded and risen significantly across many markets, Cerulli says. Consequently, expected returns across domestic asset classes appear to be low, given relatively expensive equity market valuations and historically low developed market interest rates. In response, Cerulli finds advisers and investment consultants are looking globally over the next one to two years for most investor types, including retirement plans. 

Cerulli suggests emerging and frontier markets are among the least efficient markets and are built around the most dynamic and fastest-growing economies worldwide. This presents a strong opportunity for investors in both fixed-income and equity markets, Cerulli says. As such, institutions are including these assets in their portfolios as a source of growth, income, and diversification. 

According to Cerulli, strong anticipated growth in these regions is supported by favorable demographics of an emergent middle class that should drive demand for consumer goods. As these economies develop to be more similar to western cultures, Cerulli expects a move away from export dependence towards a consumer market will likely occur.

Cerulli expects fund providers and advisers to work to step up corporate defined benefit (DB) pension allocations to less efficient non-U.S. fixed-income markets, including emerging markets. More than half (56%) said they anticipate boosting allocations to international fixed-income positions. Furthermore, while 38% of consultants expect to increase corporate DB plans’ emerging market equity and debt allocations, exactly one-quarter will likely decrease emerging market equity exposure, and 13% plan to decrease emerging market debt allocations, Cerulli says.

On the public DB side, consultants expect a similar plan to ratchet up allocations to emerging market debt and equity, especially as DB pensions continue to struggle to achieve actuarial returns between 7.5% and 8%. 

Over the next one to two years, 53% of investment consultants said they are likely to increase public DB plans’ exposure to emerging market equities, and 60% expect to boost allocation to emerging market debt. The trend toward increased global portfolio allocations also held true for consultants’ Taft-Hartley clients, Cerulli says. 

Overall, half of investment consultant respondents (50%) indicated that they plan on boosting their clients’ exposure to emerging market debt, and 42% said they anticipate increasing their clients’ international fixed-income allocations.

As predicted, Cerulli says asset allocations and average anticipated shifts vary across client segments based on their divergent needs and objectives. Moreover, within each client type, investors are not the same. For example, while some pensions are looking to immunize their portfolios, others are looking to increase their funding ratios.

Information on how to obtain Cerulli research reports is available here.