Emerging Markets Keep Providers Smiling
Byline: Ben Wright
Emerging market equity and debt managers are feeling pleased with themselves. Money is flowing into their funds at a staggering rate after years of preaching the virtues of the asset class to institutional investors that largely ignored their advice.At the beginning of the year, with traditional equities floundering and yields at record lows, investors were finally forced to look for something much cheaper. The result was that they started buying emerging market debt and equity, and lots of it.
Investors are still enamoured with the asset class despite an improvement in the performance of developed market equities in the second two quarters of this year.
Erda Gercek, country strategist for emerging market equities at Citigroup Asset Management, says: "Investors should continue to buy emerging markets equities. Both the cyclical and structural forces are behind the asset class. We have recently been getting some suggestions that the emerging market universe has already exhausted its performance potential. Obviously, we just don't believe that."
Gercek says following the crises in Russia, Brazil, Turkey and Argentina, investors normally think about emerging markets in terms of debt and debt financing. "But debt financing requirements have actually been coming down and most of these countries are running current account surpluses and have become net creditors," he says.
Gercek points to the number of countries, like Korea and Thailand, that have been paying back their IMF debt ahead of schedule. He adds: "Russia has been buying back all this low-price debt from the market and that has created a situation where we are seeing the spreads coming down from 1,500 basis points over US treasuries in 1998 to about 500 bps now."
The other big concern investors usually have about emerging markets is the threat of contagion. There is a worry that a financial crisis in one country will have an impact on the performance of the other emerging markets simply by association. However, recent crises in Turkey, for example, have not appeared to have a knock-on effect in other regions.
There is also concern over how closely emerging market performance mirrors that of the developed world and especially the US. Rupert Brandt, a director at F&C Management, believes that there has been a decoupling in the past couple of years.
"Certainly if the US went into recession then the emerging markets would not be unaffected. But on the flip side the US hasn't had a great time of late and yet emerging markets have been doing well. In part this is thanks to the fact that they are turning from purely export countries into more mixed economies," he says.
Nevertheless, despite the positive sentiment coming from developing countries and the inflows enjoyed by emerging market bond and equity funds, investors still allocate relatively small proportions of their funds to the asset class.
Currently, US institutions invest between 2% and 3% in emerging markets. Statistics show that institutions would need a 10% to 15% allocation to gain the diversification benefits of the sector. …