Feature – Emerging markets


“Emerging market sovereigns are struggling to deal with the costs of the pandemic, managing inflation and meeting pro- tracted social demands, a balance between fiscal consolidation and social strife. At the same time, financing conditions could weaken rapidly following the hasty US monetary tightening or continued escalation of the military conflict.”


The right stuff


All of this highlights the risks associated with investing in parts of the world where systems of governance fail the Theresa May test of strong and stable. Conversely, of course, the case for emerging markets has long been that the rewards can be higher if investors pick the right sector. “Much of the past 10 years of growth has been designed around an active and prosperous property market, but over-leverage and associated factors has led to stretched balance sheets,” says Gordon Ross, chief investment officer at LGPS Central. “Ever- grande has been the headline property company to get into dif- ficulties, but there have been others.” Therefore, carefully choosing the right sector in China, while understanding the political context, is crucial for investors, Ross adds. “Investing in sectors that the administration wants to succeed in and currently have support, are deemed slightly less risky,” he says. “Investments must be approached on an eyes-open basis as to the potential for rule changes that may be unforeseen and value destructive. In addition, this brings in the whole ESG focus and how to treat invest- ments going forward.”


Struggling tech


One of emerging markets big success stories have been Chi- nese technology companies. They were once the future, offer- ing seemingly endless opportunities. But now they are strug- gling, which is taking the shine off a sector that was once central to the emerging market investment case. “In technology, China has been increasingly shut out of the Western ecosystem in recent years,” says Richard Bullock, sen- ior research analyst and strategist at Newton Investment Management. First there were sanctions imposed on Huawei in 2019, which was followed by ever-increasing export restrictions on China’s access to high-end Western semiconductors. “A growing list of Chinese companies are being added to the US Commerce Department’s Entity List,” Bullock adds. This could have wider implications, if it brings Russia and China closer together. “With the strict application of Western sanctions and export restrictions on technology sales to Russia in the wake of its Ukraine invasion, a closer Sino-Russian tech- nology partnership in the coming years will become a matter of necessity for both countries, given their mutual appreciation


52 | portfolio institutional | May 2022 | issue 113


Much of the past 10 years of growth has been designed around an active and prosperous property market, but over-leverage and associated factors has led to


stretched balance sheets. Gordon Ross, LGPS Central


Risky business China’s close association with Russia makes holding its assets risky. “China’s ties to Russia have created a new geopolitical concern that requires more compensation for holding Chinese assets, we think,” says Wei Li, global chief investment strate- gist at the BlackRock Investment Institute. Li, therefore, pre- fers developed market equities, at the expense of emerging markets.


It is not just Chinese assets that could be too hot to handle. The war in Ukraine is likely to leave a stain on Russian assets for some time. London CIV is one asset owner having to reconsider its approach to Russia and has come to stark conclusions. “London CIV does not believe Russia will be an investable proposition for the foreseeable future,” says Jason Fletcher, London CIV’s chief investment officer. “Further investment is not consistent with our responsible investment policy and investment beliefs. We have, therefore, instructed all managers to make no further investment in Russia at this time.” A point echoed by Ross. “Given the current situation in Russia,


that technological progress is a matter of geopolitical survival under great power competition,” Bullock says. Those looking for an effective investment alternative, could find Chinese government bonds attractive, Ross says “given the likely trend for lower domestic Chinese rates – to avoid an economic slowdown – although the differential to other major markets has reduced in the latest quarter.”


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  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60