There’s a lot of talk about emerging markets again and IFA Magazine asked Marcelo Assalin, Head of Emerging Market Debt at NN Investment Partners, to provide an insightful update:
- what is the current state of the emerging markets sector, especially considering Brexit, new US administration etc?
Global economic indicators, by and large, continue pointing towards an acceleration of global economic dynamics in 2017. The improvement has been broad based, with the US continuing to lead the global business cycle. While the continued improvement in economic activity in the US increases the risks of additional monetary tightening, the overall yield levels are likely to be anchored by persistently and substantially lower yields in other major developed markets (i.e. Eurozone and Japan).
The prospects of fiscal spending under the new Trump administration in the US may face obstacles in the congress, and will likely be diluted to reduce its impact. Despite recent uptick, inflation should stay benign in most of the developed world (esp. Eurozone and Japan). We think that the combined picture – that of improving growth amid a benign inflationary backdrop – should not be disruptive for fixed income in the near term. Importantly, economic growth in emerging market economies has stabilized amid relatively high real interest rates, undervalued currencies, and stable-to-improving commodity prices. This positive combination of factors should offer the EMD asset class a better balance against any potential headwinds.
- which countries look good prospects?
There are a number of countries that look attractive, driven by multiple themes, and assessed via their fundamentals, market dynamics and valuations metrics. For example, Argentina has made progress on important reforms (capital controls/ trade restriction etc.) under President Macri, economic activity is on (upward) rebound, monetary policy has switched to an inflation targeting one, country has access to more capital via inclusion in the EM Local Bonds index, and among LatAm, it has the least exposure to US (via exports). Yet, it still offers a relatively attractive yield – all in all, still a relatively attractive investment opportunity despite the outperformance in the past couple of years.
Russian economy is coming out of recession, political situation is very stable, oil prices appear to have stabilised around USD 50/ bbl, FX reserves continue to be relatively solid. On top of these, the technical picture is supportive, since there has not been much issuance from Russia in the past few years. In Indonesia, reforms have made meaningful progress and efforts continue to take those further. Economic growth remains robust, and a large domestic market with relatively less integration into the global supply chain reduces the potential impact from changes in US policies (compared to other Asian economies).
- are investors understanding of the argument for EM opportunities?
Looking at the solid inflow into EMD in 2016 as well as this year, that seems to be the case. Initially, those flows were mostly driven by the search-for-yield, due to the abysmally low yields in the core markets. But as more evidence emerged of stabilizing (and improving) EM fundamentals, the flows kept up the positive momentum (notwithstanding the sell-off after US elections last year). Yet, with all those inflows, EMD flows are still a relatively small portion of global fixed income fund flows. More importantly, there are still pockets of value within the EMD space. We believe that investors will keep finding EMD an attractive investment option.
- what are the long-term prospects for EMs?
We believe that EMs will continue to grow at a faster rate than major developed economies, and will become even more important part of the global economy. The commodity price collapse and DM central bank actions may have driven the returns during 2013-2015 period, but many EM economies have weathered those storms reasonably well. The worst of the rating downgrades also seem to be behind us.
Going forward, important economic reforms could become a key driver of country performance, which would be a welcome step. Political risks in EM have usually been somewhat higher, which requires a continuous assessment based on thorough research done by experienced investors. Given these, we also believe that there will likely be meaningful dispersion in country returns, which we will seek to exploit via our active management based on rigorous research and diversification discipline.
Marcelo Assalin first joined NN Investment Partners in 2002 and is based in The Hague, The Netherlands. As well as Head of Emerging Market Debt, he is the Lead Portfolio Manager of the EMD Blended Strategies/ EMD Opportunities Fund.