December-January 2017

SPONSORED FEATURE: Down, but not out

In our final survey of fund professionals’ attitudes towards emerging markets in conjunction with Amundi, investors seem certain about which regions and assets offer the best opportunities – and the best way to access them.

It’s been a year of some upheaval in emerging markets, with new countries ascending to the sphere, such as Pakistan in June, and others – including the flagship Brics (Brazil, Russia, India, China and South Africa) grouping –– being battered by economic and political tumult.

While the results indicate investors haven’t given up hope on emerging markets, some portions of the map are viewed more positively than others. Latin America has been drawing lower interest from investors, it seems – a mere 7% ranked it as the emerging region in which they were most interested, far behind other developing prospects.

Nevertheless, Pierre Gielen, Emerging Markets Investment Specialist at Amundi, wasn’t surprised by the result, given the economic and political challenges that lie ahead for Latin America’s major economies.

“In Brazil, much needed fiscal consolidation is likely to dampen consumer sentiment, while Mexico is in the process of assessing the consequences of the protectionism stance in Washington,” he says.

China has also lost its lustre with investors. Sentiment turned against the country following its bout of stock market turbulence in August last year (dubbed ‘Black Monday’), and is evidently yet to recover; the country is only cited by 11% of investors as the most interesting emerging market.

Conversely, India still elicits significant interest. The results echo Amundi’s own stance.

“Even though we could have a short-term hit to GDP growth following Prime Minister Narendra Modi’s  reforms, we stick to the view that India is going to get out stronger and we are out for buying some selected stocks,” Pierre says.

Moreover, Asia (ex-China) as a whole is still of great interest to investors. As Pierre explains, the region has a strong, installed manufacturing basis, positive current accounts and large foreign currency reserves. Even if Donald Trump pursues policies inimical to globalisation, the region’s central banks will have relatively larger leeway to manage the adjustment in the event of more USD strengthening.

Investors seem most interested in emerging markets as a global play, consistent with Amundi’s view that global emerging portfolios bring investors built-in diversification and better risk-adjusted performance. In a universe of 23 countries, investing broadly means accessing different positioning in the growth or monetary cycle simultaneously.

FIXING INCOME
While investors were almost evenly split on the debt sectors of most interest to them, local currency debt reigned supreme, with 36% favouring it. Abbas Ameli-Renani, global emerging markets strategist at Amundi, suggests this reflects investors’ perceptions of valuation.

“Emerging market local debt has had a negative total return of 20% since January 2013, compared to a total return of 12% for dollar-denominated debt. As such, valuations appear much more compelling on the local debt side,” he says.

“However, we are of the view that hard currency debt continues to offer investors the best risk-adjusted return prospects in the medium term. This is particularly the case after the election victory of Donald Trump and the likely positive impact that his presidency will have on the US dollar. In such an environment, investors’ gains from yield can be wiped out from losses on the currency side. With hard currency debt in comparison, the key driver of returns is likely to be emerging market fundamentals, which we see undergoing significant improvement.”

Given the election of Trump, and the potential uptick it could produce in the dollar, it is perhaps surprising there is not more interest in investment grade corporate debt, as much of the market is comprised of offerings from businesses with significant exposure to the US.

STAYING ACTIVE
Over 2016, there has been a deluge of data questioning the value of active managers. On an almost monthly basis, new studies indicate the vast majority of fund managers in almost every sector consistently fail to beat their index. October’s instalment was delivered by S&P’s active-vs-passive scorecard, Spiva; it showed 99% of active US equity funds, 98% of global equity funds, 97% of emerging market equity funds and 90% of European equity funds hadn’t beaten their benchmarks since June 30, 2006.

However, investors continue to overwhelmingly favour active equity strategies as a means of investing in emerging markets, with 59% most interested in such strategies, and 53% being least interested in passives. Amundi agree emerging markets are still a place where active funds make sense and can add value. Their own outperformance in the field is a testament to this.

“We have been able to outperform through our proven approach of combining a focus on domestic demand led economies and picking stocks with a solid growth outlook, high cash flow-generative and best-in-class corporate governance, all criteria that we believe support stock prices across the cycle,” Pierre says.

Another reason investing via passive is ineffective when it comes to emerging markets, Pierre says, is that tracking an emerging markets index leads to investment in large, unprofitable swathes of industries, sucking investors into a value trap.

Equities are also far and away the most interesting asset class for investors, with only 9% being most interested in fixed income, and 15% in multi-asset strategies.

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