In recent years, emerging markets (EM) have gained traction in investors’ strategic asset allocation as part of a diversified portfolio. Despite being subject to phases of regional turbulence, the asset class should not be overlooked as a source of long-term returns.
With asset allocations now being revisited by portfolio managers, it’s also the ideal time to take another look at the traditional EM perspective.
Amundi’s Yerlan Syzdykov believes investors should move away from asset class considerations, towards a more selective approach, in order to capture country, sector or even company-specific stories in EM. He says investors need to rely on a strong understanding of the macroeconomic backdrop of each country to not only identify opportunities, but also to avoid areas where political risks match poor fundamentals.
INTEGRATING RESEARCH AND INVESTMENT
Beyond macroeconomic fundamentals, Syzdykov says developing an emerging markets’ stance benefits from integrating ‘bottom-up’ research across asset classes, to better understand sectors best positioned to gain from specific reforms or growth dynamics.
Just because an EM is showing strong growth, that one aspect alone won’t necessarily translate into a rewarding investment opportunity. For example, take the case of Mexico. In 2016, many asset managers saw Mexico as an up-and-coming EM star and recommended buying the peso (MXN) or Mexican equities. Investors were told they should not miss out on opportunities created by Mexico’s economic growth.
At that time, Amundi did not share the same views as others in the industry, and did not follow the general consensus about Mexico’s growth. From Amundi’s perspective that nation’s company earnings, structure and prospects, both from fixed income and equity standpoints, did not seem to corroborate with the widely accepted consensus.
Amundi’s view was rewarded when, in 2016, Mexico’s GDP dropped to its lowest since 2010. “We didn’t see any short-term growth in earnings and could not see it driving GDP growth,” says Syzdykov. “In this situation, our bottom-up view helped us formulate a top-down approach.”
Accessing EM opportunities requires deep knowledge across what Syzdykov refers to as the “emerging markets continuum” – knowledge that goes beyond the traditional asset classes perspective to integrate regional, country, industry or even company-specific information across both equity and fixed income. “Implementing an emerging markets continuum calls for a unique organisational set-up, coordinated under a global head of research for EM, in a unit that combines both credit and equity research. This helps to fosters in-depth insights into the capital structure of a specific company, industry or even country,” says Syzdykov.
“When complemented by analysts in the field, and knowledge acquired during meetings with CEOs and others in a particular EM market, we get a local perspective for the domestic state of play. This integrated approach enables Amundi to identify the most valuable areas for returns and helps uncover opportunities during times of market disruption. Macro views are difficult to translate into valuations but if you take the time to share perspectives and see how that translates into effects, you immediately create a lot of interest. It’s an integral part of our investment approach and it’s what sets us apart at Amundi’s emerging markets department,” adds Syzdykov.
With 73 investment professionals and €39.5 billion ($45.47 billion) of assets under active management, Amundi applies this unique approach across all asset classes and regions.
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