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Emerging market experts discuss opportunities and risks

We asked portfolio managers how they're navigating the risks and rewards in emerging markets.

Three emerging market experts have discussed the opportunities and risks of the sector with Citywire Switzerland

Gary Greenberg, a Citywire A-rated manager and head of emerging markets at Hermes Investment Management, Liam Spillane, Aviva Investors head of emerging market debt, and Bryony Deuchars, Aviva Investors portfolio manager, explain which emerging markets are the most attractive and how they're tackling the issue of corruption. 

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Three emerging market experts have discussed the opportunities and risks of the sector with Citywire Switzerland

Gary Greenberg, a Citywire A-rated manager and head of emerging markets at Hermes Investment Management, Liam Spillane, Aviva Investors head of emerging market debt, and Bryony Deuchars, Aviva Investors portfolio manager, explain which emerging markets are the most attractive and how they're tackling the issue of corruption. 

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Gary Greenberg

Head of emerging markets

Hermes Investment Management

 

In terms of sectors, we are overweight consumer discretionary, technology and financials:

  • Technology in particular has changed from a cyclical to a non-cyclical sector, as it has become an essential part of modern life.
  • Consumer discretionary names also present an interesting opportunity for investors due to the booming middle class in the developing world, which is projected to have a purchasing power of over $30 trillion by 2030. This growth is a secular trend, especially in China, India and Indonesia.
  • We think the financial sector is cheap and well-placed from a cyclical point of view.

On the other hand, we are underweight in energy, materials and utilities. We have seen strong recoveries in these sectors but we remain cautious and expect to see a deceleration of growth in China – the impact of which may slow demand for global energy materials.

In terms of countries, we are overweight China, India and the UAE. Fears about China are misplaced, although the economy may slow and rumours of a potential trade war could also cause some issues. However, we do not believe that there is a significant downturn on the horizon.

We are also positive on the UAE, an area that a lot of investors are not focused on. We believe that the higher oil prices should prove to be positive and we have exposure to the economy through two stocks, one of which is Abu Dhabi Commercial Bank.

For some countries in emerging markets, the biggest risk to their economies is the possibility of a trade war, which according to press reports, is becoming more likely.

The likes of Taiwan, Korea and Brazil – which rely on exports to China – are particularly vulnerable. While we don’t know what tariffs may look like, a dislocation could be created in a sector such as automobiles. However, India is different to other emerging markets because it is not an exporter of commodities, which means its wider economy should remain unaffected. 

Another risk to some developing countries is the withdrawal of US liquidity in the system, a consequence of higher interest rates. We’re likely to see the US Treasury issuing more bonds.

We have no exposure to Turkey due to our ongoing concerns about the economic policies being pursued by the administration. We are also watching Argentina with caution, as inflation levels are too high and the country is heavily dependent on global liquidity.

While from a top-down view Malaysia’s economy has no red flags, from the bottom-up we haven’t identified quality companies that match our ESG and investment criteria. We’re also avoiding Venezuela for reasons obvious to all investors!

Looking closely at Egypt, we think it is becoming distinctly more attractive, and we have recently taken a position in an Egyptian firm. Newly discovered natural gas resources, low labour costs, high literacy levels and a series of economic reforms suggest that real investment opportunities are shimmering on the sands. All of these factors have resulted in us taking a deeper dive into the country. 

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Bryony Deuchars

Portfolio manager

Aviva Investors 

 

We see strong opportunities in emerging markets, which are still attractively valued compared with developed markets, despite their strong performance over the past two and a half years.

Emerging markets benefit from favourable demographics. They have a large and growing middle class, which is demanding better healthcare, education and housing. A good way to benefit from this trend is by investing in small-cap firms in this space.

Unlike large caps, which are often state-related and dependent on the regulatory and political stability of the country, most small caps are driven by the underlying economic growth of the country.

While concerns about corruption tend to focus on companies close to governments in emerging markets, corporate governance is a very important aspect of investing in emerging market small caps.

Our process fully integrates this into our investment decisions and helps us to focus on companies with high standards of corporate governance, with the aim of avoiding the low-probability, high-impact events that can arise as a result of poor governance.

We tend to regard political events such as elections as mainly relevant in the short term and therefore not something that impacts our strategy as a whole. We are very much focused on long-term returns.

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Liam Spillane

Head of emerging market debt and portfolio manager

Aviva Investors 

Local currencies have attractive real yields and favourable valuations on a long-term basis, especially in countries such as Indonesia, Brazil, Malaysia and South Africa.

Over the past two years, we have held a preference for local currency over hard currency due to the fact that local currency valuations were far more compelling. In previous regimes when emerging market currencies have appreciated, as has been the case over the past year or so, they typically move from undervalued to overvalued. That has not occurred yet, which suggests further upside for EMFX.

Local currency government bonds in smaller frontier markets are increasing issuance in their local currencies and some Central American, Asian and sub-Saharan African countries are interesting due to improving fundamentals and the fact that these investments can offer portfolio diversification benefits and attractive compensation for risk.

While I acknowledge that the recent period of volatility has created some uncertainties, I think the conditions are still in place for emerging market debt to continue to perform. Macro conditions are favourable, and medium- to long-term valuations remain attractive in local currency and have become increasingly attractive in hard currency after recent market moves. As we enter a period of slightly higher volatility in financial markets, a differentiated and active approach across emerging market debt remains critical to determine those with the strongest and weakest fundamental rationales and identify the best investment opportunities.

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Gary Greenberg
Gary Greenberg
5/203 in Equity - Global Emerging Markets (Performance over 3 years) Average Total Return: 41.88%