Emerging markets held hostage by global recession
Aviva InvestorsÆ CIO for equities Niall Paul expects emerging market equities to continue to underperform until global growth stabilises.
Niall Paul is the London-based CIO for equities at Aviva Investors. He ensures that fund manager processes are operating effectively and that the Aviva Investors equity structure is able to support further growth in the management of active high-alpha equity portfolios. He shares with AsianInvestor his views on emerging market equities.
What is your weighting for emerging market equities within a global equities portfolio?
Our emerging market weighting has fallen. A lot of our emerging market holdings were mining or commodity companies and, with the sharp slowdown in industrial production around the world pointing to lower demand for those commodities, we have sold this type of stock. Another reason for selling our emerging market holdings has been the importance of China to these companies and slowdown occurring in Chinese growth, particularly in the export sector.
How has your weighting for emerging market equities changed compared to one year ago?
We have reduced it a lot. We have about one-third of the exposure we had a year ago.
Do you expect emerging market outflows to persist?
I expect outflows to persist until the rate of global growth stops declining. It will then pick up as the rate of growth improves, assuming the Bric (Brazil, Russia, India, China) economies avoid an internal economic shock of some kind.
Will the flight to safety continue to affect emerging markets?
Emerging markets will always suffer more than developed markets in a flight to quality, and while this flight to quality persists, we can expect emerging market stock markets to underperform developed markets.
What is your outlook for emerging market equities in the coming 12 months?
I expect emerging markets to underperform both in an absolute sense and relative to developed markets in the short term. Their relative performance will be dependent on the depth of the global recession and the ability of the large emerging economiesÆ (Brics) to withstand this slowdown.
What are the opportunities available in emerging market equities at the moment?
Emerging market equities offer opportunities in areas where the demand for their products is resilient to a global downturn, Gazprom for example, yet where share prices are assuming demand disappears. (Russian company Gazprom is the worldÆs largest gas company basically focused on geological exploration, production, transmission, storage, processing and marketing of gas and other hydrocarbons. The state owns a 50% controlling stake in the company.)
Which particular emerging markets do you favour?
Our process does not allocate from the top down, but rather from the bottom up. We think the Brazilian banks offer a good opportunity, from a bottom up perspective, considering the sound policies the government has undertaken over the last decade, and the lack of dependence on developed world credit by the government sector.
Which emerging markets will you be avoiding in the coming months?
Eastern Europe, given its leverage to growth in developed Europe and the high amounts of public debt in a lot of the ex-Soviet republics.
Which sectors are you bullish over?
Domestic sectors should outperform as the eternal stimulus from global growth slows and governments look to stimulate domestic consumption.
Which sectors are you bearish about?
Export sectors, particularly areas such as steel, given the large amount of leverage to global growth.
What are the biggest challenges in finding suitable investments in emerging market equities under the current market conditions?
Lack of clarity on the depth of the current global downturn.
The December/January edition of AsianInvestor magazine contains a feature on emerging market equities.
What is your weighting for emerging market equities within a global equities portfolio?
Our emerging market weighting has fallen. A lot of our emerging market holdings were mining or commodity companies and, with the sharp slowdown in industrial production around the world pointing to lower demand for those commodities, we have sold this type of stock. Another reason for selling our emerging market holdings has been the importance of China to these companies and slowdown occurring in Chinese growth, particularly in the export sector.
How has your weighting for emerging market equities changed compared to one year ago?
We have reduced it a lot. We have about one-third of the exposure we had a year ago.
Do you expect emerging market outflows to persist?
I expect outflows to persist until the rate of global growth stops declining. It will then pick up as the rate of growth improves, assuming the Bric (Brazil, Russia, India, China) economies avoid an internal economic shock of some kind.
Will the flight to safety continue to affect emerging markets?
Emerging markets will always suffer more than developed markets in a flight to quality, and while this flight to quality persists, we can expect emerging market stock markets to underperform developed markets.
What is your outlook for emerging market equities in the coming 12 months?
I expect emerging markets to underperform both in an absolute sense and relative to developed markets in the short term. Their relative performance will be dependent on the depth of the global recession and the ability of the large emerging economiesÆ (Brics) to withstand this slowdown.
What are the opportunities available in emerging market equities at the moment?
Emerging market equities offer opportunities in areas where the demand for their products is resilient to a global downturn, Gazprom for example, yet where share prices are assuming demand disappears. (Russian company Gazprom is the worldÆs largest gas company basically focused on geological exploration, production, transmission, storage, processing and marketing of gas and other hydrocarbons. The state owns a 50% controlling stake in the company.)
Which particular emerging markets do you favour?
Our process does not allocate from the top down, but rather from the bottom up. We think the Brazilian banks offer a good opportunity, from a bottom up perspective, considering the sound policies the government has undertaken over the last decade, and the lack of dependence on developed world credit by the government sector.
Which emerging markets will you be avoiding in the coming months?
Eastern Europe, given its leverage to growth in developed Europe and the high amounts of public debt in a lot of the ex-Soviet republics.
Which sectors are you bullish over?
Domestic sectors should outperform as the eternal stimulus from global growth slows and governments look to stimulate domestic consumption.
Which sectors are you bearish about?
Export sectors, particularly areas such as steel, given the large amount of leverage to global growth.
What are the biggest challenges in finding suitable investments in emerging market equities under the current market conditions?
Lack of clarity on the depth of the current global downturn.
The December/January edition of AsianInvestor magazine contains a feature on emerging market equities.
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