A closer look at emerging markets equities and bonds

A few days ago, Marc-André Hug from M&G International Investments Switzerland AG invited me to the «M&G Lunch Presentation: Emerging Markets Equities & Bonds – new opportunities on the horizon?» in their wonderful offices near Zurich main station. Claudia Calich, Head Emerging Market Debt, and Michael Bourke, Fund Manager EM Equity – two top specialists for these asset classes flew in from London. Like the audience, the presentations were high-end. Thomas J. Caduff, CEO, Fundplat LLC

• Caduff: Mrs. Calich, emerging markets are a perennial topic, and with bonds you also get more interest for the risk taken than in industrialised countries. Is now a good time to look at emerging market bonds?

Calich: Despite some of uncertainty, the broader picture is still conducive to emerging markets performing well. Whilst growth is slowing down in regions, particularly in Asia, economies have been resilient and have been largely able to adapt to a) the inflationary story and b) the resulting higher-for-longer environment. Whilst there will be some issuers, particularly those in the frontier space, who will come under more pressure, there are still signs for optimism. Parts of the market look tight on valuation grounds, mainly in the investment grade space, but the high yield space still offers plenty of value although bottom-up selection remains paramount. Another factor that is widely supportive for the asset class is that it remains largely underinvested and so from a technical standpoint there is upside potential for when markets become more comfortable with the asset class with inflows expected.

• Caduff: And what about equities in the emerging markets?

We remain optimistic that emerging markets equities close the gap with developed market stocks. Michael Bourke

Bourke: Recent years have been a painful time for emerging markets investors as returns have been poor and they have underperformed developed markets, especially US equities. Part of the reason investors have stayed away from the asset class has been to do with profitability, which has been erratic and generally weak. Return on equity (ROE) at emerging markets firms has been about half that of the US, where tech giants have delivered significant returns. However, looking ahead, we anticipate a shift in that return profile. In the past, emerging markets companies were focused on growth and many overinvested, destroying capital on unprofitable ventures. We are now observing a change in behaviour, both by state-owned companies, conglomerates and private firms. Companies are showing much greater capital discipline when committing to new projects. They are also increasingly focused on delivering returns to shareholders in the form of dividends and share buy backs. We are encouraged by this improvement in capital allocation and balance sheet behaviour and remain optimistic that it can help emerging markets equities close the gap with developed market stocks.

• Caduff: At the moment, investors around the world are risk averse. What is the mood in Switzerland for investing in emerging markets in this environment?

Hug: Our clients in Switzerland are mostly on the side-lines as well, but we see selectively demand in fixed income due to the attractive yield level and our blend approach and in equities as our strategy has a value tilt and coped well in this difficult environment and more importantly can be complementary to our clients existing exposure in the region.