Strong demand for emerging market debt and equity assets should remain, according to experts in the field.
The Neuberger Berman Group has just engaged 22 emerging markets debt (EMD) investment professionals, lifting 19 from ING Investment Management where they managed more than $16bn in EMD assets, for a new EMD platform set to cover hard and local currency mandates, as well as corporate bond and dedicated Asian debt strategies.
Neuberger Berman manages $216bn in assets, including $97bn in fixed income assets (as of March 31, 2013). The new emerging markets debt team joins a fixed income platform with over 100 investment professionals led by Brad Tank, CIO of Fixed Income.
The emerging markets debt team will be led by Rob Drijkoningen, based in The Hague, and Gorky Urquieta, based in Atlanta. Among others joining the firm are five lead portfolio managers: Bart van der Made (The Hague), hard currency; Raoul Luttik (The Hague), local currency; Jennifer Gorgoll (Atlanta) and Nish Popat (The Hague), corporate bonds; and Prashant Singh (Singapore), Asia local bond portfolios.
BlackRock has just launched two new EMD funds for European investors, following the appointment last year of a seven-strong EMD team. The new funds are the BGF Emerging Market Corporate Bond fund, co-managed by Sergio Trigo-Paz, Chris Kelly and Jane Yu, and the BGF Emerging Market Investment-Grade Bond fund, co-managed by Trigo-Paz, Kelly and Raphael Marechal.
They will complement BlackRock’s existing emerging market fixed income products (the BGF Emerging Markets Bond Fund and the BGF Emerging Markets Local Currency Bond Fund.
Alex Hoctor-Duncan, head of Europe, Middle East and Africa Retail at BlackRock, says: “With investors facing continued low yields from traditional fixed income sources, EMD should in our view be considered as part of a diversified portfolio. Historically considered by many to be a volatile asset class, EMD has experienced markedly improved creditworthiness creating a compelling income opportunity for investors and we are pleased to be in position to offer exposure in the main EMD segments.”
Trigo-Paz notes that EMD is a broad universe. “It no longer focuses purely on hard currency sovereign debt. The appetite for dollar denominated corporate bonds is growing fast and local currency debt also presents opportunities around interest rates and currency exposure. In addition, investors can diversify according to different regional dynamics,” he says.
“We anticipate that EMD returns will be largely generated through relative value opportunities. In 2013, we expect to see central banks of many emerging markets pausing for breath, and market participants pricing in some interest rate rises for banks that remain dovish in the event that inflation – stoked by QE3 [Quantitative Easing 3] – starts to bite.”
While EMD is the fastest-growing sector of emerging market investment, equities are benefiting from the opening of new stock exchanges, new listings on existing markets, greater domestic support for stock markets and undiminished flows of foreign investment.
Felicia Morrow, CIO of Global Equity Investment at Ashmore, says recent underperformance of emerging market equities against the S&P500 index has simply created more compelling opportunities.
EM equities are trading on about 11.5x earnings (versus the S&P at 13.5x), but are undervalued based on their superior growth opportunities, she says. The gap has been created by the misconception that US equities are “safe” given the concern over issues such as North Korean instability, low growth in Brazil and the Chinese leadership transition.
“These issues will resolve themselves and thus present unprecedented opportunities for active managers. For example, Korean car manufacturers are at historic lows of 5x earnings,” Morrow explains.
Consistent growth in Africa
Graham Stock, chief strategist at Insparo Asset Management, says indications that emerging markets have “bottomed out” should be the tipping point investors need to move into new markets, particularly in Africa.
“Africa offers consistent growth underpinned in many cases by structural reform that is now ancient history in most emerging markets. If you look beyond the South African border, GDP has more than tripled over the past decade in US dollar terms,” he notes.
Strong growth is driven largely by domestic momentum in private consumption and investment, alongside new capacity in the extractive sectors.
“This is why we are continually looking for investment opportunities in sectors that service this domestic demand, such as basic consumer goods, cement and banking,” Stock adds.
These opportunities exist in the main regional blocs such as West Africa (led by Nigeria) and East Africa (led by Kenya), but also in countries as diverse as Morocco, Zimbabwe, Mauritius and Angola, he says. “Africa’s growth take-off is clearly a sustainable trend, and it is a trend that is generating significant investment opportunities.”