Emerging markets find favour among fund managers

The Indonesian central bank last week announced a 25 basis-point interest rate cut - the fifth this year - keeping the shine on the country's already positive economic outlook.
The Indonesian central bank last week announced a 25 basis-point interest rate cut - the fifth this year - keeping the shine on the country's already positive economic outlook.PHOTO: REUTERS

Favourable demographics, monetary policies designed to lift growth among factors cited

Emerging market assets are among the more attractive options for investors because of favourable demographics and monetary policies designed to promote growth, investment experts said.

The trend has seen big fund houses ramping up their focus on such markets to help generate better returns as interest rates worldwide remain low.

"After several years of being neglected, emerging markets are showing a good performance this year. We are relatively constructive on emerging market assets," Schroders multi-asset investments head for Europe Aymeric Forest told The Sunday Times.

Emerging markets refer to developing economies. The MSCI Emerging Markets Index, for instance, tracks large and mid-cap counters from 23 countries and territories, including China, India, Indonesia, South Korea, Malaysia and Thailand.

There are several themes that investors can look at across the emerging markets, Mr Forest said.

"First, the demographics. There are an extra one billion middle- class consumers across emerging markets expected to arrive at the market between 2010 and 2030, according to the International Monetary Fund," said Mr Forest

Sentiment regarding emerging markets has been healthy, partly indicated by the 33.8 per cent gain in the MSCI Emerging Markets Index since the global crash in January.

"Another key theme... is a cyclical improvement supported by monetary and fiscal policy stimulus. We see that in countries such as China and Indonesia, and South Korea seems to have such plans too."

The Indonesian central bank last week announced a 25 basis-point interest rate cut - the fifth this year - keeping the shine on the country's already positive economic outlook. Earlier this month, the Bank of Korea opted to keep interest rates unchanged at record-low levels.

Sentiment regarding emerging markets has been healthy, partly indicated by the 33.8 per cent gain in the MSCI Emerging Markets Index since the global crash in January.

Schroders launched an emerging markets multi-asset fund about 18 months ago. The product is not yet available in Singapore, but Mr Forest's global multi-asset income fund - which counts Singapore as its third-biggest market globally - has been adding emerging market assets into the mix, to around a quarter of the fund exposure now.

"Since late January we have started to see signs of growth stabilisation, and we kept increasing as monetary policies continued to stay accommodative. Emerging assets have been a positive contributor to our performance," Mr Forest said.

Blackrock Asian credit head Neeraj Seth, who is the portfolio manager of Blackrock's Asian Tiger Bond fund, also has his eye on emerging markets. He said: "We believe there are good opportunities in emerging markets and Asia in the current global low-rate environment.

"As we see continued (dovish interest rate) policy from the Bank Of Japan and European Central Bank and a very gradual rate hike cycle in the United States, we see value in Asia credit offering (better yield) over developed markets and strong risk-adjusted returns compared with the rest of the emerging markets."

Mr Seth is positive on the investment grade credit in this region, which offers pockets of good value in the low-rate environment.

"In Asian local currency markets, we selectively like countries like India and Indonesia with high yields, dovish monetary policy, stable currency and macro-economic stability," he said.

But Mr Forest cautioned that a diversified and selective approach is still necessary to avoid pitfalls in emerging markets, saying: "For instance, because of excessive leverage, we would avoid Chinese financials and focus more on H shares in Hong Kong. We would also avoid Malaysia due to growth and political uncertainties.

"Meanwhile, we like Indonesia, with debt generating up to 7 per cent yield, which is quite attractive. The country also gives an indirect exposure to the commodity market, where we see a potential for prices to stabilise and even recover slightly due to the US dollar low base effect."

A version of this article appeared in the print edition of The Sunday Times on September 25, 2016, with the headline 'Emerging markets find favour among fund managers'. Print Edition | Subscribe