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Strategy Focus: Accessing emerging markets

By: Peter Eerdmans, Co-Head Emerging Markets Fixed Income and Archie Hart, Portfolio Manager Emerging Markets Equity
Why and how of investing in emerging market assets

Why now?

The overall economic and political picture across emerging markets is arguably the best it’s been in years, despite an unpredictable geopolitical environment and the prospect of rising interest rates across developed markets. The synchronised growth of both emerging and developed markets bodes well for the sustainability of the growth outlook.

Figure 1: Positive EM growth surprises led by Asia, while DM surprises led by US recently


Source: Haver, 12 October 2017. For further information on investment process, please see the Important Information section. 

In addition, the evidence suggests that an increasing number of emerging market countries are implementing policies that reflect a long-term approach. It’s heartening to see governments and companies managing their finances in a more disciplined and prudent manner.

Some of the changes we have observed indicate real efforts to improve the longer-term institutional framework of many key emerging market countries, resulting in a more promising investment environment for both emerging market equity and fixed income assets.

Policymakers are beginning to drive significant positive changes in key economies such as Brazil, China and India.

  • In Brazil, the government has imposed a ceiling on inflation-adjusted government expenditure, and is in the process of trying to reform its bloated retirement system.
  • In China, there have been numerous interventions in recent months to tighten regulation of the financial sector and reduce indebtedness.
  • In India, the ‘aadhar’ programme plans to give every adult Indian a unique ID that will enable them to begin to integrate with India’s formal economy.

Current accounts provide support

“A current account measures the transactions between one country and the rest of the world in goods, services, primary income and secondary income.” – US Department of Commerce.

Emerging market current accounts have recovered meaningfully over the past few years after a long and slow period of readjustment. The significant currency devaluations within emerging markets that began in 2013 provided a necessary condition for their gradual repair. Emerging markets have shown resilience during these tough times and we believe their economies are in much better shape as a consequence.

Current account dynamics remain supportive

Figure 2: Current account dynamics remain supportive
GDP weighted EM ex-China current account (%GDP)


Source: Haver Analytics, Investec Asset Management, 30 June 2017. 


The Trump era

Since the election of Donald Trump as US president, there has been a tilt towards populist political figures in other parts of the world. As a result of Trump’s victory and the changing global political landscape, we see increased risks. While we expect periods of volatility sparked by policy uncertainty, we believe the market has underappreciated the resilience of emerging market assets. The normalising in emerging market currency and debt markets is encouraging and we are confident that positive momentum in emerging market countries will continue to support markets.

Accessing emerging market assets

  • A core bottom-up stock-picking emerging market strategy.
  • Seeks to invest in high quality emerging market stocks with attractive valuations.
  • Emerging market valuations remain attractive compared to historical levels, offering a potentially attractive entry point.
  • As political and corporate governance standards continue to improve, we believe this will favour bottom-up stock pickers.
  • The strategy currently favours cyclicals where we are seeing growth in corporate profitability.


  • An active management strategy offers great opportunities for alpha, thanks to the disparity of returns between countries.
  • The local currency debt market is much bigger than the market for hard currency debt.
  • Yields are attractive relative to developed market debt.
  • Potential for additional returns through currency appreciation.
  • Suitable for investors seeking diversified exposure to EMD – capital gains driven by currency appreciation, credit improvement and structurally lower inflation.
  • Historically, local currency EMD has offered attractive risk-adjusted returns.


  • A long history in emerging markets:
    • More than 24 years experience in emerging markets and over 20 years in emerging currencies.
    • Local presence and experience across emerging asset classes give us excellent insight into what drives EM returns.
  • Tried and tested EM investment process which has evolved over two decades.
  • Pioneers in EM local, currency and corporate bond investing.
  • Specialist and motivated team:
    • Diverse and complementary skill sets.
    • Experienced professionals focused on emerging equity, bond and currency markets.


Specific risks

Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income.
payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. bankruptcy), the owners of their equity rank last in terms of any financial payment from that company.
Developing market: Some countries may have less developed legal, political, economic and/or other systems. These markets carry a higher risk of financial loss than those in countries generally regarded as being more developed.
Investing in China: Investment in mainland China may involve a higher risk of financial loss when compared with countries generally regarded as being more developed.

 

Important Information
The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Investec Asset Management’s (‘Investec’) judgment as at the date shown and are subject to change without notice. The value of investments, and any income generated from them, can go down as well as up and will be affected by changes in interest rates, exchange rates, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets invested in.

There is no guarantee that views and opinions expressed will be correct, and Investec’s intentions to buy or sell particular securities in the future may change. The investment views, analysis and market opinions expressed may not reflect those of Investec as a whole, and different views may be expressed based on different investment objectives. Investec has prepared this communication based on internally developed data, public and third party sources. Although we believe the information obtained from public and third party sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Investec’s internal data may not be audited. Any decision to invest in securities or strategies described herein should be made after reviewing the prospectus and conducting such investigation as an investor deems necessary and consulting its own legal, accounting and tax advisors in order to make an independent determination of suitability and consequences of such an investment. This material does not purport to be a complete summary of all the risks associated with this Strategy. A description of risks associated with this Strategy can be found in the Prospectus or other disclosure document for the fund or Strategy. Copies of such documents are available free of charge upon request. Investec does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

Investment Team
There is no assurance that the persons referenced herein will continue to be involved with investing for this Strategy or Fund, or that other persons not identified herein will become involved with investing assets for the Manager or assets of the Strategy or the Fund at any time without notice.

Investment Process
Any description or information regarding investment process or strategies is provided for illustrative purposes only, may not be fully indicative of any present or future investments and may be changed at the discretion of the manager without notice. References to specific investments, strategies or investment vehicles are for illustrative purposes only and should not be relied upon as a recommendation to purchase or sell such investments or to engage in any particular Strategy. Portfolio data is expected to change and there is no assurance that the actual portfolio will remain as described herein. There is no assurance that the investments presented will be available in the future at the levels presented, with the same characteristics or be available at all. Past performance is no guarantee of future results and has no bearing upon the ability of Manager to construct the illustrative portfolio and implement its investment strategy or investment objective.

Performance Target
The target is based on Manager’s good faith estimate of the likelihood of the performance of the asset class under current market conditions. There can be no assurances that any Strategy or Fund will generate such returns, that any client or investor will achieve comparable results or that the manager will be able to implement its investment strategy. Actual performance of investments and the Fund or Strategy overall may be adversely affected by a variety of factors, beyond the manager’s control, such as, political and socio-economic events, adverse changes in the interest rate environment, changes to investment expenses, and a lack of suitable investment opportunities. Accordingly, Performance Targets may be expected to change over time and may differ from previous reports.

Specific Portfolio Names
References to particular investment or strategies are for illustrative purposes only. Unless stated otherwise, the specific companies listed or discussed are included as representative of the Strategy or Strategies. Such references are not a complete list and other positions, strategies, or vehicles may experience results which differ, perhaps materially, from those presented herein due to different investment objectives, guidelines or market conditions. The securities or investment products mentioned in this document may not have been registered in any jurisdiction. More information is available upon request.

Indices 
Indices are shown for illustrative purposes only, are unmanaged and do not take into account market conditions or the costs associated with investing. Further, the manager’s strategy may deploy investment techniques and instruments not used to generate Index performance. For this reason, the performance of the manager and the Indices are not directly comparable. 

If applicable MSCI data is sourced from MSCI Inc. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.If applicable FTSE data is sourced from FTSE International Limited (‘FTSE’) © FTSE 2017. Please note a disclaimer applies to FTSE data and can be found at www.ftse.com/products/downloads/FTSE_Wholly_Owned_Non-Partner.pdf

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