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Focus Group: Warm on EM investment

Just three of the investors polled for this month’s Focus Group have increased their allocation to emerging and frontier markets in the past three years. The other 14 respondents have remained stable. The average proportion of respondents’ portfolios invested in emerging and frontier markets is 13.9%.

“There was no [diversification reasons] change,” says a Dutch fund. A Swiss fund states: “As it is a small amount, [it] is managed through an external investment fund where we can give our input.”

Twelve respondents say they will leave their emerging and frontier-market portfolio unchanged, while just two plan to increase allocations. A Central and Eastern European fund comments: “We are going to leave our emerging and frontier-market portfolio unchanged because we expect good opportunities [in] our market.”

Thirteen funds say they invest in emerging and frontier markets for diversification reasons. Eleven respondents point towards the long-term economic prospects and consider emerging and frontier markets most likely to show significant growth. Ten respondents highlight strategic allocation and think emerging and frontier markets have the best risk/reward profile at the moment.

Seven of those polled invest in emerging and frontier markets via an active global equity mandate, and six via a passive mandate. Almost half invest in hard-currency emerging or frontier-market sovereign debt, and five respondents in corporate debt. Six invest in local currency emerging or frontier-market sovereign debt, and four respondents in corporate debt.

Twelve respondents are confident that their emerging and frontier-market investments will contribute positive returns to their overall portfolio over the next three years. One fund is not confident, while four are neutral.

IPEs latest focus group poll - November 2016

“Growth momentum has turned in favour of emerging markets, so we expect a positive contribution,” says a senior manager at a Dutch fund. “In addition, technicals have turned, with flows being strongly positive this year.”

A Swiss fund adds: “In the last years we had positive returns, even if the markets were bad.” A Dutch fund says: “Returns in equity and other assets in developed markets are probably low. The emerging and frontier markets are likely to give relatively higher returns.”

Respondents are less sure about the ability of their emerging and frontier-market investments to outperform developed-market investments over the next three years. Twelve are neutral, while four are confident. One Swiss fund is not confident, saying: “It is just a small part of the fund, it might not balance all other losses.”

Respondents identify the economic slowdown in China as the biggest risk attached to emerging and frontier-market investments. US interest-rate rises, political risks and the commodity crisis are next on the list. Sovereign defaults and idiosyncratic risks are seen as the least likely cause for concern.

A Dutch fund comments: “Most of the risk is exogenous to the asset class, such as the US elections. Only the perception of investors makes the asset class move in certain stereotypical ways which, typically, have been a good buying opportunity after a sell off. The only key risk was FX, but that has largely abated, given the prolonged depreciation versus the dollar [over] the last two and a half years.”

Seven funds are looking to allocate to Asia (excluding China and India) over the next 12 months; five each to Central and Eastern Europe and South America; four each to China and India; and one to the Middle East.

Over the next 12 months, one-quarter of respondents are looking to allocate to active emerging and frontier-market equity; one-third via a passive global equity mandate; three to emerging and frontier-market infrastructure debt or equity; and two to emerging and frontier-market private equity.

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