Cover story | Emerging market debt
And so they have continued, according to data monitor EPFR, with around $28bn (£21.1bn) in new money rushing into emerging market assets as a whole in the last three months of the year – making up almost the entire annual total.
The bounce-back has been quicker than the 2008 financial crisis, when, despite it being little to do with them, emerging markets saw tremendous, sustained outflows. Investors, it seems, are not turning and staying away from the sector.
“If you look at the risk-adjusted returns his- torically and respectively for emerging mar- kets, they are actually really attractive,” says Mark Fawcett, chief investment officer of NEST. “They give you higher interest rates than would you have in developed markets and yet, with one or two notable exceptions, they are economies whose debt levels are lower, their trade deficits are low or possi- bly have trade surpluses.” NEST, the UK’s largest defined contribution (DC) investor, takes a strategic approach to emerging markets. “Trying to be too tactical is really tough and it is just too easy to get it wrong,” Fawcett says. “Being strategic, but thinking about risks you want to take, is more important.” And increasingly, trustees of all types of institutional investor in developed markets are willing to take these risks. Dinesh Visavadia, trustee of the Action for Children Pension Fund, says he saw some great opportunities in emerging markets as 2019 got going.
“In 2018, many emerging market countries were doing well, it was their relationship with the dollar that mainly hurt them,” Visavadia says. “The trade war did not help either. Fundamentally, emerging markets are not poor – and their outlook is good.”
IN VOGUE In Mercer’s 2018 European Asset Alloca- tion Survey, emerging market debt was the most popular non-traditional bond strategy for pension schemes. Some 18% of them said they had an allocation to the strategy,
32 | portfolio institutional | March 2019 | issue 82
with an average 5% holding. The next clos- est was multi-asset credit, with 16% of funds disclosing an allocation. Peter Thompson, an independent trustee at Capital Cranfield and former chairman of the National Association of Pension Funds, says that the asset class has become more mainstream and much more accessible. “It might not be something for tiny pension funds, but it is a sensible option for mid-to large-sized schemes who are still on their journey to maturity,” he adds. The £30bn Brunel Pension Partnership is in the process of picking a manager for a £1.1bn emerging markets equities portfolio.
The fund, which has exposure to these nations’ debt through its multi-asset credit portfolio, sees the sector as one to grab with both hands. “Emerging markets will be the source of more than half of global economic growth
to private credit as well,” he adds. “We don’t try to time the market, we just want to make sure that as part of a multi-asset port- folio we can deliver good risk-adjusted returns and these are a good diversifier.” For Dan Kemp, chief investment officer for Europe, Middle East and Africa at Morning- star Investment Management Europe, this is precisely the way to approach it. “As with any investment, you have to look at their relative value,” Kemp says, “and emerging markets look relatively attractive compared to other assets.” Morningstar has a sizable exposure to emerging market debt in its portfolio. Kemp says much of the traditional market reluctance to buy into these markets has been based on sentiment, but this can be misplaced.
“These bonds have underperformed other types of fixed income and some investors have been put off by recent performance,”
In 2018, many emerging market countries
were doing well, it was their relationship with the dollar that mainly hurt them. Dinesh Visavadia, Action for Children Pension Fund
over the next 10 years,” says Mark Mansley, Brunel Pension Partnership’s chief invest- ment officer. “Undoubtedly there is great potential here for investment managers able to think long-term and find the best opportunities.” For NEST’s Fawcett, the comparison with developed markets makes emerging ones attractive.
“Debt levels in Japan, the US, UK and parts of Europe are massive – well over 100% to GDP in many cases,” he says. “This is not necessarily true of the emerging markets, so strategically they look pretty attractive.” On a risk-adjusted basis, NEST finds emerging market debt potentially more attractive than equities due to its lower vol- atility, Fawcett says. “We evaluate emerging market debt along- side high-yield bonds, and we are just going
Kemp says. “This means things are getting cheaper – on a relative and an absolute basis – which makes them more, not less, attractive.” He says that some investors were con- cerned about trading, liquidity and geopoli- tics, which should always be considered, “but the best determinant is value and a lot of the bad news is already priced in.” However, even if many investors are con- vinced of the fundamental ethos behind holding
emerging market debt, there
remains one major hurdle for them. “You have to be careful with emerging mar- ket debt,” Thompson says. “There is cur- rency risk and quite a bit of it cannot be hedged at a sensible price, so that leaves you with hard currency – dollars – which brings in the risk of default. There are a few areas having real trouble at the moment.”
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
