Emerging markets – Feature Downside risks for emerging
markets are significant. Jose Perez-Gorozpe, S&P Global
we do not expect to be allocating any exposure to the regime for the foreseeable future,” he says. Interestingly, the monies that had historically been invested in Russia are “now allocated to other emerging markets – in terms of hard currency and local currency exposures,” Ross adds.
Market risk
When asked: does the situation in Russia require a re-think to its emerging market investments in general, Ross offers up a categorical “no.” Adding: “There continue to be benefits from such allocations in terms of diversification, investment risk and returns.” He then qualifies and expands on this: “Although we are seek- ing to reduce our limited exposure to Russian debt and equity for the obvious associated responsible investment and engage- ment reasons, allocations to emerging market debt and equity continues to be an active asset allocation decision made by our partner funds and executed either in-house or via externally procured managers.” Paradoxically, all this will have a limited impact on Russia itself, argues Bullock. “The Kremlin has been preparing its ‘fortress’ economy for siege-like conditions since the first sig- nificant sanctions were imposed on it following the 2014 Crimea annexation,” he says. “Trade with the US was already at a low level and Moscow had been substituting many of the con- sumer-goods imports from European countries with its own home-grown goods.”
Energy transition
The situation does have energy-transition implications for western governments and investors, who may need to look again at their portfolios. “Governments will need to factor geo- politics into a more pragmatic energy-transition policy, and investors are likely generally to want to accommodate fossil fuels and clean energies in their portfolios,” Bullock says. Given the perfect storm, what should investors do? “If the Rus-
sia-Ukraine conflict has taught investors anything so far, it is that the US wields enormous economic power through its con- trol of the global financial system owing to its currency hegem- ony and the ability to stop non-compliant states accessing and using its financial system,” Bullock says. This in turn could lead to a “new global currency order” with possibly the dollar, euro, yen and the pound palpable to each other, Bullock says, but “the latter three are effectively beholden to the dominance of the dollar as a result of the US’ supremacy in the ‘democratic alliance’,” he adds. Yet it could well become a more complicated picture, especially for investors. “The emergence of a multi-polar world economy with autocratic and democratic blocs that are competitive along technological and security lines, yet largely independent in their economic interaction – save for non-strategic value chains such as low-end manufacturing and bulk commodities – has profound implications for investors,” Bullock says.
A long-term view For some investors, there is no need to get ahead of ourselves. Essentially, there is no great need for change in the emerging market investment outlook. What is happening should not dis- tract from the appeal of emerging markets, Ross says. “Although, while there is much that is negative in emerging markets, they play an important role in investor portfolios and continue to be a good diversifier for allocations and returns,” he adds. “You need to be conscious of the economic and political stabil- ity of the particular countries. Many are either oil producers or oil dependent so economic health will be strongly correlated to the price movement of oil,” Ross says. “Many have already increased monetary policy to fight inflationary pressures and there are several national elections during 2022, where regime changes could add to the caution.” Therefore, for Ross, while taking into account the pitfalls, emerging markets continue to play an important role, despite the many converging factors seemingly undermining them. “Emerging markets continue to be a part of our partner fund’s asset allocation for emerging market equity and debt exposure for diversification and risk-adjusted returns,” Ross says. At the same time, it is important to have an effective process, employing trustworthy managers when investing in emerging markets. “We procure external managers for both disciplines and have allocated monies to them,” he adds. “These managers are appointed following a robust process that analyses the phi- losophy, process and the team that manage the product ena- bling us to determine suitably skilled providers, that will man- age the products we have designed to achieve our partner fund’s investment requirements.”
This proves there is more than way to see out a perfect storm. Issue 113 | May 2022 | portfolio institutional | 53
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