Funds Europe and Sergei Strigo of Amundi analyse the results of a survey that shows a high level of interest in emerging markets.
Investors may not yet have unleashed the torrents of emerging market fund flows that were anticipated earlier this year, but a Funds Europe survey in partnership with Amundi reflects the optimism felt in 2016 for the region’s economies and markets.
Reduced fears about China’s growth, positive sentiment about India’s actual growth, and a stabilising political landscape in Latin America probably sit behind survey results that showed 63% of fund professionals were “positive” about emerging markets and 11% felt “very positive” (see pie chart).
Funds Europe carried out the online survey in partnership with Amundi, the asset management firm, throughout May and June, and 95 fund professionals took part.
“It is fair to say we have seen some stability in macro-economic and political trends in the EM region,” says Sergei Strigo, portfolio manager and head of emerging market debt and currency at Amundi, who comments on the results. He’s referring partly to market-friendly governments and the avoidance of less orthodox economic doctrines in Latin America and Indonesia.
CHINA CORRELATION FACTOR
After showing much positive sentiment to broad EM assets, survey participants were then asked about how they would make their equity allocations. The majority (40%) said their biggest allocation would be to Asian equity markets; the next biggest preference was for global emerging market equity (31%); then for Latin America equity (21%). Finally, 11% said their preference would be for Europe, the Middle East and Africa equity (see graph).
Asian countries are more correlated to China growth, so it is no surprise to Strigo that Asia ranks as the most popular allocation now that markets feel more relaxed about the Chinese economy. He notes also that China and India are the two countries in the global emerging market universe that are growing at the most rapid pace.
“The answer suggests the vast majority of people are not terribly worried about the China slowdown, and I would agree. The Asian equity universe, for example, probably feels like a safer bet than Latin America now as it is more liquid and Asian currencies have not depreciated as much as some of the EMEA and Latin American currencies.”
Positive sentiment towards India has been reflected in increased buying of Indian equities over recent months, and in the medium to long term, the country has tremendous potential for infrastructure development, says Strigo.
Together with GDP growth of 6-8%, “India makes a good story.”
In fact, our survey respondents showed an overwhelming preference for India as a preferred destination of EM investment. The third survey question asked respondents to rank their top three countries in the EM region and India was the first choice for 37% of them, followed by China (19%) and Indonesia (13%).
It would be hard for investors to invest as much into the Indian fixed income sector as they have done in equities. Not many Indian government bonds are available to foreign investors due to restrictions on foreign ownership. However, Strigo notes that there are some opportunities to buy corporate bonds, although the market is not cheap.
Similarly, in China investors are waiting for clarification on the extent to which China’s fixed income market will become more open to foreign investors.
Indonesia has been one of the best stories in the Asian region, too. A general election has seen a more market-friendly government put in power and investor appetite for Indonesian bonds has increased.
“We consider Indonesian bonds to be relatively cheap compared to other Asian fixed income and it’s one of our main overweight positions in that region,” says Stigo.
Asked how equity allocations compare with debt allocations for mining the EM opportunity, Strigo says that emerging market equities are more sensitive to GDP growth than debt and he points out that emerging market economies have not seen a significant acceleration of growth. Countries such as Brazil and Russia are slowly recovering from recession, helped by increasing commodity prices.
Underpinning greater EM interest are the ongoing low yields in developed market bonds, which serves to make EM debt more favourable to investors. Despite the attractions of higher yields, investors remain underinvested in EM bonds, says Strigo.
“Investment in emerging market debt is very, very low in our view. Within the retail segment, there was pretty much an exodus from EM debt in 2013 when the ‘taper tantrum’ occurred and they haven’t meaningfully come back.”
The mix of pressure from low yields and better political and macro-economic trends could unleash flows back into the EM bond asset class, Strigo says.
Investors, certainly on the retail side, are not really invested in EM debt so there’s great scope for them to increase these allocations. The main risks have been Fed monetary policy. At best there has been mixed data year to date and rhetoric has
gone from dovish to hawkish, and back to dovish again.
“But the market isn’t pricing in any meaningful rate hikes this year and if that continues for reasons that do not scare investors – such as recession – but just due to slow growth, then I think that investors will for sure come back to EM markets.”
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