What opportunities do Emerging Markets offer for equity & fixed income investors post COVID-19?
As countries worldwide rally financially to offset the economic effects of the COVID-19 crisis, CAMRADATA’s latest whitepaper on Emerging Markets focuses on the developing markets and considers opportunities in both the equity and fixed income arena of this dynamic region.
The whitepaper includes insight from guests who attended a virtual roundtable hosted by CAMRADATA in September including representatives from Amundi Asset Management, Mackenzie Investments, Muzinich & Co, Aon, Blue Sky Pension Fund, Riscura and Willis Towers Watson.
The report highlights that whilst the growth outlook may be uncertain in many emerging markets at present given the pandemic and the differing government and policy responses, there is a general consensus in the investment community that Asian countries have contained the virus better than many Western countries, with swifter implementation of lockdown measures, resulting in earlier recovery.
Sean Thompson, Managing Director, CAMRADATA said, “It is vital that, rather than lumping all emerging markets into a single monolithic group, investors recognise the varying responses in handling the coronavirus as this will translate into market performance.
“Investors will also need to keep an eye on the US presidential election given the spill-over effects on emerging markets and limited capacity for further fiscal or monetary stimulus. But there are opportunities for investors in emerging markets.
“With a higher exposure to technology than other regions, Asia is well poised to benefit given the sector has been one of the few beneficiaries of the pandemic. Our expert panel explored opportunities and concerns for investors as we move through the pandemic and emerging markets begin to recover.”
Most panellists at the event agreed that financial markets are out of kilter with the underlying economy. However, none of the panel has changed their fundamental investment strategy despite the extraordinary effects of COVID-19 and largesse in response from states and central banks. Looking forward, many see great opportunities in debt and equity for active managers; plus, a standalone allocation to China in equities is becoming the norm.
Key takeaway points were:
- The last six months have highlighted the need for diversification, according to one investor who took the long view when it comes to Emerging Markets and could tolerate short-term volatility.
- From an economic perspective this year could be described as a “working-capital crisis” that has been solved through access to liquidity because all central banks have been accommodating.
- Some panellists said their main concern was that some countries will not mend the deterioration in their expenditure caused by the fight against COVID. Investors in some EM debt will thus see an impact on inflation and local currencies.
- The key to robust performance in equities in recent times has been maintenance of a core strategy, with some balance between Value and Growth.
- The equity markets’ recovery has come from multiple expansion by tech companies rather than a broad base. Local economies have continued to struggle while dot.com stocks have continued to do well.
- One panellist introduced the idea that the models for Value might need revision, saying that certain aspects investors are now considering such as sustainability are harder to quantify, not least because these are longer-dated considerations but with comparatively little historical data.
- The panel discussed the independence of central banks in Emerging Markets, which have been receiving praise for years by keeping their distance from government’s broader political policies.
- However, COVID has changed this with Quantitative Easing and closer policy alignment of central banks and their government. The debt managers on the panel were concerned some Emerging Markets central banks will overstretch themselves.
- Much of the risk assessment of Emerging Markets’ debt revolves around whether an issue is denominated in strong foreign currencies or local currency; and how much of total issuance local investors are willing and able to buy.
The discussion ended looking at equities, and in particular Chinese equities. The panel noted that investors allocating to China require more research to understand the norms and dynamics in China and build up expertise of the universe and comfort to allocate more capital to a less familiar market.
However, it was agreed the world’s second largest economy sat awkwardly within Emerging Markets index, with one panellist pointing out that China is not emerging in foreign policy or tech. People spend lots of time thinking about how to allocate to the US but not China.
The whitepaper also features two articles from the sponsors offering valuable additional insight. These are:
- Amundi Asset Management: ‘Emerging Markets and the new silk road routes’
- Mackenzie Investments: ‘Quantitative investing in a pandemic creates both challenges and opportunities in Emerging Markets’
To download the Emerging Markets whitepaper click here