Volatility in Emerging Markets Brings New Opportunities

Insights for global investors in multi-asset and fixed income.
PS615-TL-Standard-Life-Investments-PortraitsFrom Left: Richard House, Alexander Wolf, Mark Foster

Today there are major differences among emerging and frontier markets around the world, creating new multi-asset and fixed-income opportunities, according to investment professionals at Standard Life Investments (SLI).

“It’s been a volatile year for the economies of Brazil, Russia, India, China and South Africa (BRICS),” says Richard House, head of the Emerging Markets Debt Team at Standard Life Investments, “We are very positive on India, unlike Russia or Brazil.”

China – the largest of the BRICS – is trying to rebalance its economy away from credit-fueled investment toward consumption-led growth, says Alexander Wolf, emerging markets economist for Standard Life Investments. “That will benefit new sectors, such as e-commerce and domestic tourism,” he says.

The opening of the Shanghai-Hong Kong Stock Connect followed by the Shenzhen-Hong Kong Stock Connect will make it easier for U.S. and international investors to purchase domestic equities, Wolf adds. 

Growth in corporate debt issues

House notes that while emerging market sovereigns have been relatively quiet in terms of new debt issues, there has been growth in the corporate fixed-income sector. “This is now a $3 trillion asset class that will create many opportunities for fixed-income investors in the future,” he says.

Building a robust multi-asset portfolio can be an important factor in managing volatility when investing in emerging and frontier markets, according to Mark Foster, investment director for absolute return, liability driven investing (LDI) and multi-asset investing for Standard life Investments. “We run different scenarios in our multi-asset portfolios in order to provide resilience in future unknown stress events like, say, the case of a hard landing in China,” he says.

However, Foster notes that volatility in emerging markets can also create opportunities for an active fund manager to add value to a portfolio, or even invest in a volatility strategy itself. “We analyze the emerging and developed markets to find situations where the actual volatility is likely to differ from what is already priced into the markets.” he says.

The differences among emerging markets are also apparent in Latin America. While Brazil is struggling now, Colombia and Chile have diversified their economies and implemented fiscal reforms, making them more attractive for fixed-income investment, says Wolf. However, he remains cautious about investing in equities, adding, “It’s hard to predict when most Latin American companies will see strong earnings growth.”

House notes that multi-asset managers also have an opportunity for currency plays. “Almost all Latin American currencies have been under pressure for the past few years,” he says. “In Mexico and some other countries, a cheaper currency will have a positive effect on the balance of payments – one reason to be slightly optimistic about the region.”

Oil prices help some, hurt other EMs

From a global perspective, the recent decline in oil prices has made some emerging markets more attractive than others. “Turkey has benefited from lower oil prices,” says Wolf. “However it has cut interest rates, due in part to political pressure, and remains highly vulnerable to a pending U.S. rate hike.”

On the other hand, Indonesia has taken advantage of falling oil prices to reduce public fuel subsidies and allocate the fiscal savings towards increased infrastructure spending, adds Wolf. “That is a much more positive scenario for supporting domestic economic growth,” he says.

Turning to the frontier markets, House says Sri Lanka, Vietnam, Paraguay, the Dominican Republic and Guatemala offer tactical and strategic investment opportunities.

“In general, we encourage investors to think about the emerging and frontier markets in a selective manner, rather than as one large ‘basket,’” he says. “Investing in an actively managed fund can provide exposure to those opportunities, while avoiding countries that are most susceptible to higher U.S. rates or other major risks.”

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