Despite recent jitters, the fundamentals for emerging markets are strong. Even with global trade tensions and an uptick in volatility, the majority of panellists at Citywire’s virtual debate, in association with T. Rowe Price, argued the investment case for developing economies remained.
Traditionally, emerging markets (EM) have been a tactical play for many. But what is it about the structural story that excites investors?
Yoram Lustig, head of multi-asset solutions for Europe, the Middle East, Africa and Latin America at T. Rowe Price, identified three key reasons for a strategic allocation to emerging markets, with portfolio construction being one of them.
‘At 10%, EM equity represents a meaningful weight in the MSCI All Country World index. China alone makes up around 5% of the index,’ Lustig said. ‘That just goes to show that emerging markets do have a strategic role to play, especially if you manage portfolios on a global basis.’
On the fixed income side, EM debt can offer investors superior growth and income while also adding to diversification. ‘They may be deemed a riskier asset class but allocating to emerging markets can actually reduce overall portfolio risk.’
But emerging markets have more to offer than diversification. Lustig also highlighted their return potential and referred to the widening gap between developed and emerging market equities: ‘Our five-year expected returns for US large-cap growth equities are currently 5.3% per year, compared to an annual 7.3% for emerging market equities. That’s two percentage points extra. In the case of EM debt, we expect returns of 3.9% for the next five years, compared to only 1.9% for global aggregate. Again, that’s an extra two points per year for emerging markets.’
On the whole, Lustig said, emerging markets potentially offer more opportunities to generate alpha than their developed peers.
Lustig’s third reason to strategically invest in emerging markets was what he called ‘the triple premium’, a trifecta of growth, demographics and change.
Emerging markets, as a group, are growing at a faster rate than their developed peers, boast a younger population and are currently going through a series of fundamental improvements, including a stronger focus on corporate governance, a rising middle class and more balanced economies. ‘Moderation in inflation, for instance, may lead to falling interest rates in some emerging markets, which could give an extra boost to asset prices,’ Lustig said.
Roman Mayer, global head fund advisory at UBP, agreed: ‘We see positive demographics and a lower debt burden, I think it’s fair to say that emerging markets have delivered.’
Emerging economies have experienced a remarkable growth trajectory over the past 20 years, with China leading the way. As Mayer pointed out, the biggest initial public offerings and technology firms in the world are coming from China. Yet many investors are still shying away from gaining exposure to emerging markets.
‘I understand that there are preoccupations against the volatility of EM equities, which tend to be higher than in other asset classes,’ he said. ‘I also get why you would want to have a home bias. But if you take a holistic approach to your portfolio, you should consider EM assets, whether fixed income, debt or frontier markets, as a strategic allocation without trying to time the market.’
Beware when the music stops
Mayer’s words resonate in the current environment of extremes. With an increasing number of investors concentrating their focus on fewer companies. ‘Everyone wants to own the Zoom’s, Google’s and Amazon’s, but this is not an infinite game,’ Mayer warned. ‘The party will stop at some point, so you better make sure that you have an appropriate diversification in place. However, there’s still this preoccupation which stops investors from allocating money to EM assets.’
Could a weak US dollar be a catalyst for investors to overcome reticence toward emerging markets?
Ulrich Voss, head of capital markets at Tresono Family Office, believes so, but he also urged investors to keep the bigger picture in mind: ‘You cannot see it in isolation. We have a weaker dollar, but we also have an environment where there are other problems due to the weakening demand in developed markets. In the long term, however, I think you need to have a strategic view on emerging markets.
‘There was an old saying in the 1980s or 1990s – “emerging markets are a market you cannot emerge from in an emergency”. But I think that’s changed. Emerging economies are considerably less dependent on commodity producers and are home to a rising number of stronger local businesses instead.’
Bart van de Ven, advisor and fund selector at Accuro Wealth Advisors, however, was not convinced to the extent of progress made.
Expressing his concern over the quality of EM assets, he said: ‘All the reasons to be in emerging markets – growth, demographics etc – were also there 20 years ago, but during that period, a lot of emerging markets like Brazil, Argentina, South Africa or Turkey had their problems, both in stocks and in bonds,’ he said. ‘We cannot find the quality we want in specifically these emerging countries, so we keep a very low allocation to emerging markets.’
T. Rowe Price’s Lustig, on the other hand, believes that the scarcity of high-quality stocks is a boon for active managers. ‘If you’re able to identify those pockets of quality, you can uncover hidden gems, whether that be companies or countries that are likely to benefit from future change,’ he said.
From his point of view, the general quality in emerging markets has improved significantly over the last two decades. Volatility has reduced considerably, while the drawdowns are no longer as severe as they once were. The portion of investment grade in emerging market debt indices has also increased, Lustig said.
‘Emerging markets have come a long way in terms of increasing quality, but you have to be able to identify this through fundamental analysis. It takes a lot of resources and hard work; it’s not easy, but that’s the advantage. I think the lack of widespread quality is actually an opportunity to add alpha. Yes, you have to be careful and selective, but that’s the beauty of the asset class.’
KEY RISKS
Transactions in securities denominated in foreign currencies are subject to fluctuations in exchange rates which may affect the value of an investment. Returns can be more volatile than other, more developed, markets due to changes in market, political and economic conditions. Debt securities could suffer an adverse change in financial condition due to ratings downgrade or default which may affect the value of an investment.
ADDITIONAL INFORMATION
MSCI: MSCI and its affiliates and third-party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
IMPORTANT INFORMATION
For investment professionals only. Not for further distribution.
The specific securities identified and described are for informational purposes only and do not represent recommendations.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
EEA ex-UK – Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Switzerland - Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
UK - This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.
202011-1421053
Emerging markets: Overlooked and underrated?
1
2
3
In a Citywire roundtable event, investors examined why developing economies are yet to make their presence truly felt in globally diversified portfolios.
‘Emerging markets have a strategic role to play, especially if you manage portfolios on a global basis’
Yoram Lustig
‘Emerging economies are considerably less dependent on commodity producers but are home to a rising number of stronger local businesses instead’
Ulrich Voss
1
1. Source: Capital Market Assumptions, Five-Year Perspective 2020, T. Rowe Price.
Yoram Lustig
Head of Multi-asset solutions for Europe, the Middle East, Africa and Latin America, T. Rowe Price
Roman Mayer
global Head of Fund Advisory, UBP
Ulrich Voss
Head of Capital markets, Tresono Family Office
Bart van de Ven
advisor and fund selector, Accuro Wealth Advisors
Emerging markets: Overlooked and underrated?
In a Citywire roundtable event, investors examined why developing economies are yet to make their presence truly felt in globally diversified portfolios.
Despite recent jitters, the fundamentals for emerging markets are strong. Even with global trade tensions and an uptick in volatility, the majority of panellists at Citywire’s virtual debate, in association with T. Rowe Price, argued the investment case for developing economies remained.
Traditionally, emerging markets (EM) have been a tactical play for many. But what is it about the structural story that excites investors?
Yoram Lustig, head of multi-asset solutions for Europe, the Middle East, Africa and Latin America at T. Rowe Price, identified three key reasons for a strategic allocation to emerging markets, with portfolio construction being one of them.
‘At 10%, EM equity represents a meaningful weight in the MSCI All Country World index. China alone makes up around 5% of the index,’ Lustig said. ‘That just goes to show that emerging markets do have a strategic role to play, especially if you manage portfolios on a global basis.’
On the fixed income side, EM debt can offer investors superior growth and income while also adding to diversification. ‘They may be deemed a riskier asset class but allocating to emerging markets can actually reduce overall portfolio risk.’
But emerging markets have more to offer than diversification. Lustig also highlighted their return potential and referred to the widening gap between developed and emerging market equities: ‘Our five-year expected returns for US large-cap growth equities are currently 5.3% per year, compared to an annual 7.3% for emerging market equities. That’s two percentage points extra. In the case of EM debt, we expect returns of 3.9% for the next five years, compared to only 1.9% for global aggregate. Again, that’s an extra two points per year for emerging markets.’
On the whole, Lustig said, emerging markets potentially offer more opportunities to generate alpha than their developed peers.
Lustig’s third reason to strategically invest in emerging markets was what he called ‘the triple premium’, a trifecta of growth, demographics and change.
Emerging markets, as a group, are growing at a faster rate than their developed peers, boast a younger population and are currently going through a series of fundamental improvements, including a stronger focus on corporate governance, a rising middle class and more balanced economies. ‘Moderation in inflation, for instance, may lead to falling interest rates in some emerging markets, which could give an extra boost to asset prices,’ Lustig said.
Roman Mayer, global head fund advisory at UBP, agreed: ‘We see positive demographics and a lower debt burden, I think it’s fair to say that emerging markets have delivered.’
Emerging economies have experienced a remarkable growth trajectory over the past 20 years, with China leading the way. As Mayer pointed out, the biggest initial public offerings and technology firms in the world are coming from China. Yet many investors are still shying away from gaining exposure to emerging markets.
‘I understand that there are preoccupations against the volatility of EM equities, which tend to be higher than in other asset classes,’ he said. ‘I also get why you would want to have a home bias. But if you take a holistic approach to your portfolio, you should consider EM assets, whether fixed income, debt or frontier markets, as a strategic allocation without trying to time the market.’
Beware when the music stops
Mayer’s words resonate in the current environment of extremes. With an increasing number of investors concentrating their focus on fewer companies. ‘Everyone wants to own the Zoom’s, Google’s and Amazon’s, but this is not an infinite game,’ Mayer warned. ‘The party will stop at some point, so you better make sure that you have an appropriate diversification in place. However, there’s still this preoccupation which stops investors from allocating money to EM assets.’
Could a weak US dollar be a catalyst for investors to overcome reticence toward emerging markets?
Ulrich Voss, head of capital markets at Tresono Family Office, believes so, but he also urged investors to keep the bigger picture in mind: ‘You cannot see it in isolation. We have a weaker dollar, but we also have an environment where there are other problems due to the weakening demand in developed markets. In the long term, however, I think you need to have a strategic view on emerging markets.
‘There was an old saying in the 1980s or 1990s – “emerging markets are a market you cannot emerge from in an emergency”. But I think that’s changed. Emerging economies are considerably less dependent on commodity producers and are home to a rising number of stronger local businesses instead.’
Bart van de Ven, advisor and fund selector at Accuro Wealth Advisors, however, was not convinced to the extent of progress made.
Expressing his concern over the quality of EM assets, he said: ‘All the reasons to be in emerging markets – growth, demographics etc – were also there 20 years ago, but during that period, a lot of emerging markets like Brazil, Argentina, South Africa or Turkey had their problems, both in stocks and in bonds,’ he said. ‘We cannot find the quality we want in specifically these emerging countries, so we keep a very low allocation to emerging markets.’
T. Rowe Price’s Lustig, on the other hand, believes that the scarcity of high-quality stocks is a boon for active managers. ‘If you’re able to identify those pockets of quality, you can uncover hidden gems, whether that be companies or countries that are likely to benefit from future change,’ he said.
From his point of view, the general quality in emerging markets has improved significantly over the last two decades. Volatility has reduced considerably, while the drawdowns are no longer as severe as they once were. The portion of investment grade in emerging market debt indices has also increased, Lustig said.
‘Emerging markets have come a long way in terms of increasing quality, but you have to be able to identify this through fundamental analysis. It takes a lot of resources and hard work; it’s not easy, but that’s the advantage. I think the lack of widespread quality is actually an opportunity to add alpha. Yes, you have to be careful and selective, but that’s the beauty of the asset class.’
1. Source: Capital Market Assumptions, Five-Year Perspective 2020, T. Rowe Price.
1
ADDITIONAL INFORMATION
MSCI: MSCI and its affiliates and third-party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
IMPORTANT INFORMATION
For investment professionals only. Not for further distribution.
The specific securities identified and described are for informational purposes only and do not represent recommendations.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
EEA ex-UK – Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Switzerland - Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
UK - This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.
202011-1421053
‘Emerging markets have a strategic role to play, especially if you manage portfolios on a global basis’
Yoram Lustig
‘Emerging economies are considerably less dependent on commodity producers but are home to a rising number of stronger local businesses instead’
Ulrich Voss
Yoram Lustig
Head of Multi-asset solutions for Europe, the Middle East, Africa and Latin America, T. Rowe Price
Roman Mayer
global Head of Fund Advisory, UBP
Ulrich Voss
Head of Capital markets, Tresono Family Office
Bart van de Ven
advisor and fund selector, Accuro Wealth Advisors
Emerging Markets
round table discussion
Emerging markets: Overlooked and underrated?
How blending EM debt can generate capital gains in fixed income
What are the challenges
and opportunities of investing in emerging markets?
KEY RISKS
Transactions in securities denominated in foreign currencies are subject to fluctuations in exchange rates which may affect the value of an investment. Returns can be more volatile than other, more developed, markets due to changes in market, political and economic conditions. Debt securities could suffer an adverse change in financial condition due to ratings downgrade or default which may affect the value of an investment.
Emerging Markets
round table discussion
Emerging markets: Overlooked and underrated?
How blending EM debt can generate capital gains in fixed income
What are the challenges
and opportunities of investing in emerging markets?
How blending EM debt can generate capital gains in fixed income
In a Citywire roundtable debate, four experts looked at how the changing global economic landscape could present attractive opportunities in the varied and historically underappreciated sector of emerging market debt.
With central bankers slashing interest rates to the bone to combat the global Covid-19-induced recession, the higher yields on emerging market (EM) debt represent an increasingly attractive proposition to investors. Even before the pandemic, interest rates and bond yields had fallen into negative territory in many countries – at one point in 2019, an astounding US$17tn of global bonds traded at negative yields. EM debt may come with greater risks, but investors are increasingly turning to it in the search for income.
As Yoram Lustig, head of the multi-asset solutions team for Europe, the Middle East, Africa and Latin America at T. Rowe Price pointed out, the predicted return for EM debt for the next five years is 3.9%. In comparison, it’s just 1.9% for the global aggregate.
‘This is going to be especially important in an environment with higher beta. Passive returns are likely to be less than they were in the previous decade,’ he said. ‘So those extra two percentage points are going to be meaningful.’
As well as the potential for superior growth and income, one of the main reasons investors turn to EM debt is as a diversifier, with the potential to broaden a portfolio by diversifying against different countries, currencies, industries, yield curves and credit ratings. Some consider it a better option than EM shares, as EM debt tends to offer low correlation with developed market stocks and bonds, cushioning against volatility when markets underperform.
Lustig is a particular proponent of investing in EM corporate debt, a market that is now larger than the US high yield market or EM sovereigns, with US$2tn in issuance across 50 countries. ‘I think this is one of my favourite asset classes because if you look at the yield of the EM corporate bond index, it’s about 4.5% at the moment and the duration is about five and a half years,’ he said. ‘So it’s one of the asset classes with the best ratio of yield to duration, which means that it can perform both in an environment when rates are going up – or at least outperform other fixed income asset classes because it has much shorter duration than most other fixed income asset classes – and you have the yield pick-up. Importantly, it has historically performed well in both rising and falling interest rate environments, and I think that makes it very attractive.’
Although the sector is growing quickly, many investors remain cautious about allocating to some emerging markets, such as South American countries, due to perceived weaker institutions, policies and higher economic volatility. ‘Why should I invest in a country like Argentina that’s had nine defaults since becoming independent 200 years ago,’ asked Bart van de Ven, advisor and fund selector at Accuro Wealth Advice in Antwerp, Belgium. ‘I don’t see the need.’
While the others agreed about the importance of being selective, especially when investing in sovereigns, quasi-sovereigns and local currency, they are bullish about the progress EM debt has made as an asset class in recent years. Roman Mayer, who oversees allocations made by private clients to investment funds at UBP private bank in Zürich said that investing in emerging markets, particularly in Asia, is no longer something to be feared.
‘I’m coming from the point of view that it is a developed asset class,’ he said. ‘I think many clients are afraid of allocating to emerging market debt because they fear higher defaults. But when I look at the progress emerging market debt has made, we have now liquid markets, deeper markets, heterogeneous asset classes, and these companies or countries are managed better than they used to be run in the past. We have governance, oversight and regulation. This doesn’t bar us from defaults or from fraud, but if you have the right manager, the right solution and if you have a well-articulated process and philosophy, I think you can achieve decent diversification and also pick-up if you allocate to fixed interest.’
For investors unsure about which specific area to back within the realm of EM debt, Lustig points out that one option is to take an unconstrained approach and go with a blended exposure to the asset class. ‘My favourite approach for emerging markets is to blend,’ he said. ‘So, to blend hard currency sovereigns, local currency and corporates; then you have the full range of emerging market debt investments in your portfolio. That is the opportunity we try to take for many of our clients.’
Given the current global trends, Lustig predicts that, over the coming years, emerging markets could offer the same opportunities that were on offer in developed markets two decades ago. ‘Emerging markets in some ways are like going back in a time machine,’ he said. ‘If we have falling rates in emerging markets, we may have the boost that we got in developed markets over the last 20 years. So, there is still an opportunity to make capital gains in fixed income. Where else, these days, do you get the potential for that?’
‘Emerging market debt has the potential to perform in both rising or falling interest rate environments, and I think that makes it very attractive.’
Yoram Lustig
‘When I look at the progress emerging market debt has made, we have now liquid markets, we have institutional governance, we have institutional oversight and we have regulation.’
Roman Mayer
IMPORTANT INFORMATION
For investment professionals only. Not for further distribution.
The specific securities identified and described are for informational purposes only and do not represent recommendations.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.
T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
EEA ex-UK – Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Switzerland - Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
UK - This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.
202011-1421053
1. Source: Capital Market Assumptions, Five-Year Perspective 2020, T. Rowe Price.
1
Yoram Lustig
Head of Multi-asset solutions for Europe, the Middle East, Africa and Latin America, T. Rowe Price
Roman Mayer
global Head of Fund Advisory, UBP
Ulrich Voss
Head of Capital markets, Tresono Family Office
Bart van de Ven
advisor and fund selector, Accuro Wealth Advisors
Emerging Markets
round table discussion
Emerging markets: Overlooked and underrated?
How blending EM debt can generate capital gains in fixed income
What are the challenges
and opportunities of investing in emerging markets?
KEY RISKS
Transactions in securities denominated in foreign currencies are subject to fluctuations in exchange rates which may affect the value of an investment. Returns can be more volatile than other, more developed, markets due to changes in market, political and economic conditions. Debt securities could suffer an adverse change in financial condition due to ratings downgrade or default which may affect the value of an investment.
Emerging Markets
round table discussion
Emerging markets: Overlooked and underrated?
How blending EM debt can generate capital gains in fixed income
What are the challenges
and opportunities of investing in emerging markets?
Yoram Lustig
Head of Multi-asset solutions for Europe, the Middle East, Africa and Latin America, T. Rowe Price
Roman Mayer
global Head of Fund Advisory, UBP
Ulrich Voss
Head of Capital markets, Tresono Family Office
Bart van de Ven
advisor and fund selector, Accuro Wealth Advisors
Yoram Lustig
Head of Multi-asset solutions for Europe, the Middle East, Africa and Latin America, T. Rowe Price
Roman Mayer
global Head of Fund Advisory, UBP
Ulrich Voss
Head of Capital markets, Tresono Family Office
Bart van de Ven
advisor and fund selector, Accuro Wealth Advisors
What are the challenges
and opportunities of investing in emerging markets?
With different political regimes and cultural attitudes, knowing how to use your money wisely can be difficult in developing economies. Citywire brought together a panel of emerging market experts to highlight the major issues.
With the coronavirus pandemic showing few signs of abating, the financial climate has rarely been more challenging. However, recent signs have shown that investors are beginning to return to emerging markets, following panic induced sell-offs earlier this year.
Ratings agency Moody’s reported a surge in overseas debt issuance in Q3 2020, with investors looking to gain exposure to the emerging market sector as a means of accessing greater returns. Some managers are now increasingly looking to reduce their traditional US equity allocations in portfolios, with emerging markets looking more attractive at current levels.
‘We think that US equities are rather richly valued,’ said Roman Mayer, who oversees allocations made by private clients to investment funds at UBP in Zürich. ‘We think that the breadth in the market is very low; it’s driven by a few stocks, and there’s probably more room for disappointment than for anything else. We can take parts of the allocation to US equities and pivot into an area where we have underrepresentation and we think this is domestic China. Usually, when China starts giving more credit into the economy, we see a good uptick in future returns.’
When it comes to emerging markets, Asia, and China in particular, is the overriding focus for most funds. As Mayer and the other members of the panel pointed out, countries such as China and South Korea are not truly ‘emerging’ in most senses of the word, given their global dominance in sectors such as technology and fintech. But, when it comes to the index, there are major opportunities for growth.
‘Right now, China just represents 5% of the (MSCI AC World) index,’ Mayer said. ‘We think it will continue to grow because sectors like technology and particularly domestically oriented companies are thriving, and also when you look at the progress they’ve made on capital market access, how quickly they settled with international regulations when they were introducing Stock Connect.’
In the eyes of Ulrich Voss, head of capital markets at Tresono Family Office in Cologne, the Asian continent has long had the most potential as an emerging market. ‘Our stance was always to look at Asia as it has the biggest population density and development,’ he said.
Voss pinpoints Vietnam as a market that particularly stands out in terms of untapped potential, due to the combination of a relatively large and young population, with an average age of just 25. But, unsurprisingly, it is still China that draws the most attention from investors. Because of the perceived importance of the Chinese market, many asset managers have spent considerable time and money on researching new opportunities in this area. As an example, T. Rowe Price has recently increased its focus on China’s A-share market as it has opened up.
‘We have a lot of analysts with boots on the ground,’ said Yoram Lustig, who heads T. Rowe Price’s multi-asset solutions team for Europe, the Middle East, Africa and Latin America. ‘Currently, it’s more challenging to actually get the boots on the ground because it’s more difficult to fly, but our philosophy is fundamental research. Because China has also become such an important market on its own, we are focused on taking a differentiated approach that goes beyond the “mega-cap” names commonly found in other China focused portfolios, and being flexible when it comes to investing in both onshore and offshore opportunities in China.’
Accessing opportunities within the Chinese market is not always straightforward. While progress has been made in recent years, it remains relatively opaque which is why many managers look to appoint China specialists to manage that part of the portfolio. ‘There is much more quality in China today than there was three years ago or five years ago,’ said Bart van de Ven, an advisor and fund selector at Accuro Wealth Advice in Antwerp, Belgium. ‘But it’s still a different world with its own system, its own rules.’
There are also certain risks involved with investing in equities and debt in any emerging market. Lustig highlighted that currently, one of the main downsides of investing in Chinese stocks is the uncertainty relating to the tensions between the US and China. 'I think it goes beyond just a trade conflict,’ he said. ‘It’s a race for global supremacy. Some may call it Cold War II and that will have impact on the global companies from China because countries will need to take a side.'
To negate this, Lustig believes that bottom-up security selection is necessary, providing room to react dynamically to changing global events. Active managers who invest in emerging markets also feel that incorporating environmental, social and governance (ESG) criteria into the security selection process is important, because it helps watch for key shortfalls in governance such as corruption and incorrect treatment of minority shareholders.
However, implementing some ESG factors when selecting emerging market securities can be challenging, especially when viewed through the lens of the West. ’When we invest, we don’t only have ESG integrated in the process, but also have an exclusion list to avoid some of the sectors like tobacco or, in some cases, controversial weapons,’ Lustig said. ‘But ESG can be a challenge because some countries have less of a luxury to focus on environmental factors like we have in the developed world. Sometimes, on the social element of ESG, there is more inequality in some emerging economies. We tend to think that you cannot have proper ESG under a regime which is not democratic, but it’s not always the case.’
Such challenges are inherent to investing in new growth sectors around the globe, but Lustig is bullish about emerging markets in the coming years, as a new source of income for investors. ‘Western asset managers invest a lot in emerging markets,’ he said. ‘Because of where they are at the moment, they have much more room for innovation. For us, as investors, on the equity side we don’t invest in countries; we invest in securities, we invest in businesses. There are opportunities to pick the companies which are the most innovative in each country. There are risks; it’s a risk asset, no doubt about that, but because it’s a risk asset, there are benefits.’
‘There is much more quality in China today than there was five years ago, but it’s still a different world with its own system and its own rules.’
Bart van de Ven
‘ESG can be a challenge because some countries have less of a luxury to focus on environmental factors like we have in the developed world.’
Yoram Lustig
ADDITIONAL INFORMATION
MSCI: MSCI and its affiliates and third-party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
IMPORTANT INFORMATION
For investment professionals only. Not for further distribution.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision.
T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
EEA ex-UK – Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Switzerland - Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
UK - This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.
202011-1421053
Emerging Markets
round table discussion
Emerging markets: Overlooked and underrated?
How blending EM debt can generate capital gains in fixed income
What are the challenges
and opportunities of investing in emerging markets?
KEY RISKS
Transactions in securities denominated in foreign currencies are subject to fluctuations in exchange rates which may affect the value of an investment. Returns can be more volatile than other, more developed, markets due to changes in market, political and economic conditions. Debt securities could suffer an adverse change in financial condition due to ratings downgrade or default which may affect the value of an investment.
Emerging Markets
round table discussion
Emerging markets: Overlooked and underrated?
How blending EM debt can generate capital gains in fixed income
What are the challenges
and opportunities of investing in emerging markets?
