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18.06.2019 17

Investing in the changing shape of Emerging Markets

Published June 18, 2019

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CIO Letter


 

The emerging markets (EM) universe has experienced significant changes in the last decade with the further addition of investible countries (ie China A shares in 2018), the surge in the size of EM bond markets and the further development of the local currency bond markets.

This world in transformation remains highly heterogeneous as differences between EMs exceed similarities and that’s why extensive research is key to identify the variables that at each point in time are the main drivers of each economy, the investment factors that can be most remunerative and the portfolio allocation that can deliver the best risk/return payoff.

Despite having been around for more than 30 years, emerging markets investing still accounts for a marginal part of institutional investors’ portfolios. However, looking ahead, we expect to see an acceleration towards EM investing. The ongoing development of domestic markets becoming more open to international investors and increasingly diversified should be a major catalyst.

The need to search for new sources of returns will be an additional key supporting element for further embracing EM investing. In fact, global investors will face a more subdued return environment over the next five years and further out. Given a developed world where adverse demographic dynamics will weigh on future potential growth and interest rates look set to stay low for longer. 

In a world of diminished return potential, the ability to tackle market opportunities and the search for sustainable alpha will be even more relevant. This is key in particular in the EM world, where our research shows that EM discrimination on the basis of the vulnerability factor can be rewarding, especially in times of crisis.

In our view, to capture the next wave of returns in EM, investors will have to embrace what we call an EM-MOVES (Multi-Opportunity Vulnerability-Enhanced Selective) approach based on an assessment of the vulnerability of each economy and an analysis of the five key drivers of EM opportunities (Debt, Dynamism, Diplomacy, Dependency, Domestic demand). The ability to look at the full capital structure and bring together varied expertise (loans, debt, equity, distressed situations) will help with moving beyond traditional investing in EM and foster new innovative solutions across the full EM spectrum.

 

To find out more, download the full paper

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