In this report, produced by the Economist Intelligence Unit and sponsored by BNY Mellon, we examine how investors, faced with a dearth of investment opportunities in developed markets, are approaching emerging markets. This is the second of two follow-up papers to The search for growth: Opportunities and risks for institutional investors report, published in June 2011, which, based on a global survey of almost 800 institutional investors and corporate executives, examined the prospects for market growth across a range of sectors, regions and asset classes. The first follow-up paper, The search for growth: Rethinking asset allocation, was published in October 2011. 

Investors believe relative risks are changing. Many investors feel that the developed markets have become more risky while the emerging markets have grown less so. Political dysfunction, once seen as largely a legacy of dictatorship and colonial rule, is now a clear threat in the US and the euro zone as those governments struggle with enormous debt problems, wobbling domestic economies and increasingly angry electorates.

Short-term concerns exist about liquidity and asset price bubbles. Many institutional investors worry that demand from foreign investors will simply exceed the supply of emerging-market investments available. If more developed market investors expand their emerging market exposures, their actions may trigger price bubbles or volatile boom and bust cycles.

Worries abound that emerging markets will be affected by problems in developed world. Investors are concerned that emerging markets would suffer if demand from developed world customers dries up. Emerging nations are also major investors in developed world debt and equities and would be hurt by a developed market downturn. But some institutional investors believe a slowdown in growth would help reduce the risks that emerging markets will overheat.