Arnaud Mounier says Axa Asia has just 1% in emerging markets
Amid lacklustre yields from US government and corporate bonds and European equity markets, asset managers underweight emerging markets have a lot of catching up to do to boost exposure.
But caution is the name of the game, say market participants, particularly around riskier assets such as junk bonds.
Speaking on a panel at AsianInvestor's Asian Investment Summit in Hong Kong last week, French insurer Axa Asia, Aberdeen Asset Management and Indonesian civil service pension fund Taspen discussed emerging-market opportunities.
Just 1% of Axa Asia’s €500 billion ($644 billion) is in EM fixed income and equities, says Arnaud Mounier, regional chief investment officer, but the question of being "more present" in emerging markets has been raised numerous times since 2011.
Today, investing on behalf of the group's insurance businesses across eight entities in the region, Mounier's team focuses heavily on researching local-currency bond market fundamentals, namely the level of long-term risk premiums, rather than short-term technical levels.
"If the [EM bond is issued in] hard currency, then we look at this as a diversification from corporate bonds issued by European or US issuers,” he says, noting that the latter have seen yields squeezed even more recently.
But for local-currency EM bonds, Axa Asia takes a different allocation approach, as the appreciation of local currencies often offers different risks and returns from those of hard-currency issues.
Donald Amstad, business development director at Aberdeen Asset Management (Asia), says that while EM fixed income offers more attractive opportunities than, say, US Treasuries, Asian EM "high-yield bonds" are a misnomer, as their returns, often below 5%, can hardly be called high yield.
“[As] they are junk bonds being politely called high yield, we are very concerned about money piling into this market indiscriminately, as many investors are buying bonds issued out of dodgy companies and structures," Amstad says. "It is almost like a car crash waiting to happen."
He points to the $1.5 billion dollar bond issue last year by Chinese internet search engine Baidu, which targeted US investors. The company used a structure registered in the Cayman Islands, called a variable-interest entity, to issue two tranches of five- and 10-year corporate bonds.
Aberdeen's credit and equity analysts had given the go-ahead, but on closer examination its bankruptcy lawyer had cautioned that variable-interest entity structures give creditors no legal recourse to the company's assets if the entity were to go bankrupt. In such a situation, coupon payments will only be done out of the goodwill of the company.
"This is equity dressed up as bond," says Amstad.
As Chinese corporates rely more on dollar bond markets or offshore renminbi bond markets than Chinese domestic bank loans, says Amstad, Aberdeen tends to take a more conservative approach and often views these markets sceptically.
However, he adds, many large investors do not have enough EM exposure. US and UK pension funds usually only invest 1-2% of their assets in emerging markets, says Amstad, and will need to play catch-up, as EMs will account for 70% of global GDP by 2050.
On equities, Aberdeen tends to hold investments for a long period of time – the firm has been in seven of its top 10 holdings in its Asia-Pacific emerging-market equity fund for over 10 years.
Meanwhile, Mounier says his investment team feels it's important to give the equity fund manager as much flexibility as possible to "play one market against the other".
"What is important when investing into EM equities is that one should not be constrained by an index, as there is a lot of alpha [that can be] generated from tactical allocation between countries,” he says. “Indexes are not the main driver.”
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