GLOBAL - Pension funds will rethink their exposure to emerging market currencies as they face "new realities" in 2011, according to a report by consultancy Mercer.

Divyesh Hindocha, global consulting director, said: "The tendency among institutional investors has been to focus on the first aftershock of the crisis.

"With the second and third aftershocks, investors will need to step back and look at what it will mean for them in the long term."

Divyesh claimed the need for revaluation went beyond short-term tactical allocation to the implications for pension funds of broader macroeconomic trends.

"Investors need to be reviewing their strategies," he said.

In macro terms, the report divides the developed world into "hair shirt" Europe, which is getting its financial house in order, less stable peripheral Europe and the US, which has yet to move decisively in the direction of fiscal stability.

"At some point, the structural faults need to be addressed - notably, how to sustain growth past the artificial stimulus created by policymakers," Divyesh said.

Yet global economic rebalancing is likely to entail currency changes in emerging markets, with the appreciation of those markets' currencies - particularly the renminbi.

"These are not cyclical points - this is structural," said Divyesh. "Investors might conclude, for example, that emerging market currencies are a decent exposure to have - and that they should have much more than they currently have."

He added: "Investors have tended to be wary of emerging markets, but with structural changes they have to rethink them."

Meanwhile, the decline of sovereign debt as a low-risk investment requires a revisited approach to investing in bonds.

At the same time, forecast pressure over the next few years should encourage pension funds to scrutinise their portfolios for robustness within an inflationary environment.

"These are not easy things to think about," said Divyesh. "For trustees meeting once a quarter, these are not straightforward issues. We're bringing these issues to our clients - but it will take a while."