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ROUNDTABLE: EmERgiNg mARkETs

42

Frisby: How would you put the case

for investing in emerging markets

to pension funds, particularly in this

climate?

O’Malley: Emerging markets are

clearly the growth story currently.

They are markets that offer the most

attractive growth prospects. And

they’re also coming from a much

healthier fiscal framework, having

gone through a lot of the debt

de-leveraging that has been talked

about in the developed world. There

is some concern about things like

China’s ability to have a soft landing,

or to manage a soft landing, parti-

cularly on the real estate side. But it

does appear that China will continue

to grow and it has the financial

flexibility to manoeuvre through

the markets effectively. Longer term,

we’re all seeing the opportunities

that come from the growth in the

middle classes, particularly in China

and India. We see that as oppor-

tunities for managers like ourselves

to invest in a number of areas

such as healthcare, consumer, infra-

structure etc, so there’s an awful lot

of opportunity for growth in emerg-

ing markets over the medium term.

There’s not enough investment in

emerging markets. If you look at

GDP, emerging markets is some-

thing like 50 per cent of the world’s

GDP but it’s currently about 13-14

per cent of the MSCI index. That has

increased from about 5 per cent

over the last five or six years, so it is

going in the right direction. Most of

the growth that we’re going to

experience over the next two to

three years is going to come from

emerging markets, so indices pro-

bably need to have a look at them-

selves and evaluate their weightings.

Mattiko: What always interests

me is definitions. What is emerging

markets, because we say £1 out of

every £10 is invested in emerging

markets. I think that that’s not

accurate if you look through bases,

because if you took any number of

European companies – Nestlé or

Unilever, for example - if you look

through earnings or you look

through their assets then they have

a significant exposure to emerging

markets. So I think people might

have a bigger exposure to emerging

markets on a look through basis

than the actual allocation of

emerging markets. A benefit for

emerging markets from a stock

pickers perspective is that emerging

markets are still immature from an

investment perspective and hence

there’s a degree of inefficiency in

emerging markets that you can still

exploit relative to some developed

markets which are much more liquid

and much more mature, so that’s

trying to add value through active

management. Now that is changing

as emerging markets become more

mainstream. Some of the efficiency

and opportunities are being arbi-

traged away, but there is still more

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43

Chair: Kevin Frisby, Partner, LCP

Kevin joined LCP’s investment team in 2008 and became a partner in 2009. He is involved in the provision of invest-

ment advice to trustees, corporate clients and charities, bringing his investment advisory and research experience

together to assist in the formulation and implementation of investment solutions. Kevin is a member of the alterna-

tives team, where he heads up the research into diversified growth managers - a relatively new but increasingly

popular innovation with our clients. Prior to joining LCP Kevin gained 12 years of investment consulting experience;

eight with HSBC Actuaries (as head of research and development), and prior to this four years with the £5 billion

IBM UK pension scheme as the in-house consultant.

Melanie Cusack, Client Director, Pitmans Trustees LImited

Melanie has worked in the pensions industry since 1988 addressing both statutory and non-statutory actuarial and

non-actuarial aspects of UK occupational pension schemes. A qualified pensions actuary, she also has strong pro-

ject management skills and a pragmatic ‘can-do’ approach. Melanie joined Pitmans Trustees Limited in November

2009 and is now an independent trustee for a portfolio of pension schemes, both final salary and defined contribu-

tion. She works alongside lay trustees on several schemes, often as the chair, and also as the lead where PTL is

sole trustee for her other schemes.

Javier Corominas, Head Of Economic Research and FX Strategy, Record Currency Management

Javier Corominas is Head of Economic Research and FX Strategy at Record. Along with the CIO and Head of

Portfolio Management, Javier is a member of the Investment Management Group (IMG) which oversees all Record

currency funds and segregated client portfolios. Furthermore, Javier and his team provide fundamental and

macroeconomic research, modelling and analysis of G11 currencies as well as emerging market currencies with a

view to developing new investment products and generating new trading strategies. Before joining Record, Javier

worked as Chief European Economist at a leading macroeconomic forecasting consultancy and holds both a BA

(First Class) and MPhil degree in economics from Cambridge University.

Tapan Datta, Principal, Aon Hewitt

Tapan Datta is a Principal at Aon Hewitt developing asset class views within the global asset allocation team.

These views are extensively used in both investment advisory and delegated consulting services as part of the

medium-term asset allocation service offered by the firm. His work and market perspectives spans all the major

asset classes. He has been with Aon Hewitt since 2007, and his previous investment experience was at Schroders

as a Director of Investment Strategy and at American Express Bank as Deputy Chief Economist. He has a Ph.D in

economics from Cambridge University.

Gregory Mattiko, Portfolio Manager, Emerging Markets Equities, J.P. Morgan Asset Management

Greg Mattiko, executive director, is a portfolio manager in the emerging markets equity team. He joined the firm in

2003 and has been managing the Discovery strategy since September 2005. Prior to joining J.P. Morgan, he was a

director of portfolio management for Value Management and Research AG, based in Kronberg, Germany for seven

years, where he was responsible for European Long/Short, European Technology, Global, and US equity funds. In

addition to managing portfolios, he is a former director of the supervisory board of a French exchange-listed com-

pany, advised institutional clients in global asset allocation, and has experience in private equity valuation. Previous

to Value Management and Research, he worked for Fidelity Investments for four years in Dallas, Luxembourg and

London. He has a Bachelor’s degree in economics from Ohio State University and a Master’s degree in banking

and financial management from Boston University. Greg is a holder of the CFA designation

Terry O’Malley, Senior Vice President, Director of International Institutional Sales Calamos International LLP

Terry O’Malley joined Calamos at the end of 2009 and is responsible for developing the Calamos presence in the

Institutional direct and consultant marketplace in the United Kingdom and continental Europe. Terry has more

than 20 years experience in the pensions and investment industry. Prior to joining Calamos, he was Head of U.K.

distribution for a number of large global institutional asset managers, running sales, consultant liason and client

relationship teams for Credit Suisse, Invesco and Fidelity. Terry was instrumental in setting up INVESCO Pensions,

a UK Life Co; to establish and distribute pooled life funds for DB & DC clients. He was a main board Director at

INVESCO Pensions.




44

room for active management in

emerging markets, it is a fertile place

to look if you are seeking alpha.

Frisby: There is a case for active

management in emerging markets,

where often people say that

emerging markets are inefficient,

small caps are inefficient. Is it mainly

an intuitive case, or is there lots of

empirical evidence?

Mattiko: The easiest way to look

at it would be whether emerging

markets managers are able to beat

the benchmark more frequently

than in developed markets. What

I tend to find is my investment

horizon is substantially longer than

the people on the other side of

the transactions or than the local

market participants. The markets in

emerging markets tend to be much

more news flow driven and the local

participants are typically trying to

trade around what the large institu-

tional investors like myself are trying

to do, and that creates shorter term

price anomalies that I can exploit.

Corominas: We find it puzzling to

understand how most equity man-

agers not based locally in emerging

market countries with access pri-

marily to top down news flow can

actually add significant alpha over

time relative to local players in

emerging markets. The nature of the

asset class means it lends itself to

teaming up with local partners or

local investors as the news flow is

constantly changing and so is the

uncertainty around the likelihood and

impact of regulatory changes that

managers need to keep abreast of.

Datta: The case for emerging

markets should be based on higher

returns for the same amount of risk

or negligibly higher risk, so the risk-

return combination is enhanced.

Also, that from an efficient frontier

basis you hope to secure some

benefits of diversification. This is

potentially enhanced if you have

some sort of basket of emerging

market assets, rather than thinking

just in terms of equities. In terms of

experience, it has been disappoint-

ing. During the middle of 2008

emerging markets outperformed

for a few months on the back of

the Bear Stearns event. That didn’t

last. This and events in 2011 both

show that decoupling in a very

modern, very integrated financially

integrated world is a myth. Diversi-

fication aspects are therefore quite a

difficult sell for emerging markets.

So the case has to be based around

returns. You need an evalu-ation of

how much extra return you can

expect out of emerging markets

relative to developed markets,

depending on your time horizon.

That will partly depend on relative

valuations.

Frisby: In terms of looking at

emerging markets, firstly should

we start to slice it up into different

regions and secondly, do you think

there are diverging prospects for

different emerging market regions.

Perhaps Asia versus Latin America,

Central America?

Corominas: There are some

notable differences in emerging

market countries. The label emerging

markets as a catch-all phrase should

lead one to the question: What does

this concept try to capture? If it is

a story based around per capita

income levels, then certain countries

like Korea from my point of view

should not now be classified as

emerging any longer. If it is based

around corporate governance struc-




ture, the rule of law, etc, then again,

there is ample differentiation within

emerging markets. What most of

these countries have in common is

that they are perceived as a collec-

tive to be on the path of economic

and technological convergence with

the developed world.

O’Malley: Well it’s clear that

emerging markets have traded

together in the past but there are

clear differences between a lot of

the countries. We tend to look at it

as exposure to emerging economies

as opposed to looking at emerging

markets per se. We take quite a lot

of data in from places like the

Heritage Foundation, which shows

the amount of movement in eco-

nomic freedom in all these countries.

By that, I mean how easy is it to set

up business? What’s the fiscal law?

What’s the taxation? How welcoming

are they of new money for inves-

tors coming in? How do they treat

capital? I.e. we don’t necessarily

invest in Russia because we feel

that transparency is a huge problem.

Some of the Chinese banks etc,

we’d have trouble getting to the

bottom of what they do, so we tend

to look at other things about where

there’s been move-ment. We look

at who’s opening up and allowing

investors in, and that takes you

to a level below just looking at

emerging markets and just looking

at countries or regions, so there’s

a number of issues: sales versus

domicile, there’s economic freedom,

taxation transparency, infrastructure,

all of those things.

Mattiko: It depends on whether

you’re thinking active or passive

management. From a passive pers-

pective, it’s easy to get exposure to

the entire block and if you’re making

a top down allocation you can buy

exposure of an entire block. But

from an active manager’s pers-

pective, you are uncovering 30

countries that all have different

dynamics, they all are moving, the

divergence of returns of the different

markets within emerging markets,

so we’re making the point where

correlations have gone up over time.

You can take a long time series of

correlations; they’ve gotten closer

and closer. Emerging markets have

got closer and closer to developed

markets, so as a block you’re losing

some of that diversification benefit.

But if you strip away and look at the

individual countries, there’s a very

large divergence from returns,

especially in the last year. An active

manager can add value but you

have to be within what your abilities

are. And I think that it’s probably

easier for an active manager to add

value from a bottom up perspective

with less different moving parts to

look at.

Datta: The answer, thinking long

term, depends on how you get

emerging market exposure, what

structure you use and whether you

have some sort of dedicated allo-

cation to emerging market equities

and/or debt. Our preference strate-

gically would be for a global approach

because there’s some diversification.

Clearly there’s a big cycle within

emerging markets that limits how

much diversification there is, but

there is still some gain from having a

global approach. But alongside that,

one wouldn’t be averse to taking a

regional view if the case for a single

region was very compelling.

Cusack: One thing that comes to

mind with this discussion is how do

you actually differentiate between

the different areas? As an investor

I think there are the different

objective ways of doing it, which is

what you’re expecting your manager

to do. I don’t think any pension fund

trustee would actually sit there and

say I think you should be investing in

this particular sector for all these

reasons.

Mattiko: I think it’s important

that people still understand that

emerging markets is a higher beta

asset class and it is going to be

susceptible to flows and to market

sentiment. And when you have

general risk aversion in markets like

we had in 2011 I think one should

still continue to expect that emerging

markets are going to be a higher

beta part of the entire asset pool. So

when times are poor then emerging

markets will probably underperform

because by nature they are higher

beta and the same thing goes for

when markets are rising. So, to me,

emerging markets underperforming

in a risk averse environment like

2011 is not a surprise.

Corominas: This is the struggle

that pension funds face because

they’re looking for uncorrelated

asset classes but there is a shortage

of them. Some of the return drivers

of emerging markets are not neces-

sarily positively correlated with risk,

i.e. duration, but by and large,

emerging markets do not fit into the

description of being uncorrelated,

especially during highly risk averse

environments.

Frisby: Do you think primarily the

case for some new emerging market

equities is for a longer term return

rather than a source of significant

diversification?

Corominas: From a currency

manager’s perspective, when we

talk about emerging markets we’re

being slightly disingenuous as we

should be talking about the dif-

ferent asset types within emerging

45

“Emerging markets have traded

together in the past but there are

clear differences between a lot

of the countries”




46

markets. So when investors think

about emerging markets, most of

them tend to think about emerging

market equities. However, from the

currency perspective, emerging

market currencies run at about a

third of the volatility of equities. A

discerning investor can appreciate

that there are certain currencies in

Asia that are actively managed by

central banks so they will dampen

the volatility for you because that’s

part of their policy package. So the

volatility of, say, the Chinese Yuan

against the dollar is about 4 per

cent, Taiwan is only slightly higher.

Therefore, when you invest in emerg-

ing markets currencies, your volatility

experience is actually very different

to investing in a broad equity index.

Frisby: If you look at how emerg-

ing markets currencies generally

behaved last year then they were

behaving like a ‘risk on’ asset and

if you look at the third quarter

in particular, that was a severe

drawdown for emerging market

currencies. Granted they weren’t as

volatile as equities but if you assume

that emerging market currency

managers do use varying degrees

of leverage then surely the case for

many market currencies as being a

diversifier is not particularly robust.

Datta: The real diversifier last

year was from having a balanced

approach which would have had

exposure to dollar denominated

debt. Given the big setback in

currencies, other emerging market

asset classes were knocked back. In

general, it is hard to make a separate

case for emerging market currency

given how intrinsic it is to emerging

market assets generally.

Cusack: But isn’t it the time

horizon that’s important? If we were

looking for something that never did

poorly we wouldn’t be in this

particular sector as a pension fund

but because we’re looking to get a

broad allocation across different

sectors and trying to minimise the

down side for various parts of the

liability portfolio, it’s OK to have a

couple of bad years. Often, we look

at it quarterly, we monitor it quarterly

and then we work out if a decision

should be taken. I think it takes a

very confident trustee board to say

‘no, a long term strategy is best, we

have to just grit our teeth and not

react on a short term basis as that’s

not what we’re meant to be doing’,

but I do think some of them are

managing to do it.

O’Malley: But there is a natural

acceptance by trustees and experts

that the very nature of emerging

markets says that because they are

inefficient and are growing and

developing, it will provide a bumpy

ride. The thing is you accept it on

the basis that you’re looking for a

long term reward. The other thing

to remember was last year was

not a typical year. It was very macro

driven last year, a lot of risk on risk

off, big flows of money in and out.

That in itself caused a lot of volatility

and a lot of things that we expected

to happen last year in terms of

inflation didn’t happen. Just bearing

that in mind, it clearly spells out a

bright future for emerging markets

over the next five years. Simply

because you can already see the

shift that’s already happening.

Western governments want to

deflate the currencies and emerging

market currencies will have to live

with stronger currencies as part of

solving the global rebalancing.

Frisby: In terms of trying to

address the volatility, is it a thought

to allow the fund manager to have

the broadest of briefs? It’s about

being active, but not only active in

picking stocks but having the ability

to own debt and currency either

through the assets or outright and

also being as flexible as you possibly

can, rather than just slavishly having

to stick to an equity benchmark in

order to get an emerging market

equity experience. Is that the way to

try and dampen down risk?

Mattiko: I can’t avoid the currency,

so I’m judged against my benchmark

in either pounds, dollars or euros.

I cannot avoid the currency question,

but I can avoid the debt versus

equity. The currency is baked in, so

I have to have a view on the currency.

Now, we don’t hedge so my

currency view is implicit in my stock

selection. Now, fixed income is a

completely different subject and I’m

looking at 30 different countries

and have 30 different dynamics. As

a stock picker, it’s hard enough to

keep track of what’s going on there.

I don’t think a stock picker can

on top of that make the asset allo-

cation call nor should they make

the asset allocation call. It’s my per-

sonal opinion that that call should

be made by the trustees, by the

pension fund itself, how they want to

allocate assets within emerging

markets. Now, the exception to that

is the manager who operates within

emerging markets that has much

more of a top down process if

“There is a natural acceptance by trustees and experts

that the very nature of emerging markets says

that because they are inefficient and are growing

and developing, it will provide a bumpy ride”




47

they’re making top down asset allo-

cation calls already, then they may

have an opinion with regards to the

proper mix between debt and equity.

Cusack: I think it really depends

upon the people around the table.

Some trustees really want to do it

themselves, others say no and just

want to hand it all over to someone.

As part of their due diligence

process they ask the questions

about how the manager will go

about it. But the approach varies

quite considerably I think across

trustee boards.

Corominas: If you believe in the

emrging markets convergence

story, then you don’t want to

eliminate the currency exposure.

One of the big unknowns for most

investors is that if you look at the

source of the return in emerging

markets over the last 14 years, close

to 50 per cent of the return for the

broad equity indices came from

currency, and for debt it’s even

higher, close to about 60 per cent,

so we argue that given that the

return from currency is so large,

investors should consider whether

it is warranted that it should be

managed independently of, say,

equities.

Datta: The point you’re making

is that half the returns came from

currency but if you were investing

in the equity markets you got

that return, so the equity market

exposure gives you not only the

equity returns and the benefits you

get from rising earnings growth,

you also get currency benefit,

because you’re investing in the local

currency. So by having equity

exposure in emerging markets,

you’re getting the benefits of equity

and the benefits of currency.

Frisby: Is the currency a beta?

Corominas: We think it is - if you

just look at the risk/return numbers,

for the last 14 years emerging

markets currency generated about

4 per cent return annualised with

only 8 per cent volatility. If you invest

in equities, you get a small additional

return, but for three times the

volatility. Effectively, because

currency is an unfunded investment

accessible through forward con-

tracts, you can then gear up those

return numbers and benefit from

that higher information ratio, tar-

geting the absolute return level you

desire. This is also an opportunity

that is accessible in a cheaper

fashion. There are no custody costs

when you invest in currency. There

are no admin and legal fees to

speak of, you’re effectively trading

with a bank here in London and for

what are typically passive-level type

fees, you can access what we think

is the best risk adjusted return in

emerging markets.

Datta: The flaw in this is that the

last decade is exceptional. We can

look at currencies, equities, emerging

markets debt spread trends in this

period and then think about whether

these can be used as a forward

looking basis for setting policy, but I

don’t think we can, because a lot of

that represents a move from very,

very depressed levels when

emerging markets were among the

most unloved asset classes around.

Cusack: The way I’m hearing this

is, there is emerging market equity

and currency, and we don’t neces-

sarily need the currency because it’s

already implicit in the approach

you’re having, but in theory currency

could stand on its own and still

provide emerging market exposure.

Currency, certainly on the boards

that I’ve been on, is more often

presented as ‘you’re in emerging

markets therefore you need to

think about the currency aspect’. It

is not usually presented as its own

asset class.

Frisby: Emerging market debt is

an evolving and maturing asset

class. There’s been a number of

significant upgrades to investment

class over the last 10 years in Brazil

and Mexico and others that are now

investment grade, which is some-

what ironic, that it seems to be that

emerging markets are improving

their credit rating while developed

markets are reducing so there may

be cross-over in the future and more

variety with emerging debt. So are

you excited about the prospects

of emerging market debt as an

element of return and also possibly

diversification?

O’Malley: What I was surprised

at was that over 70 per cent of the




48

index is now investment grade. The

J.P. Morgan emerging market on

corporate indexes is 70 per cent

plus investment grade, which sur-

prised me actually. And the total cor-

porate bonds in emerging markets

is well over $500 billion and is

scheduled to be the biggest in terms

of new issuance this year, of over

$100 billion of new issuance. So all

of those numbers are not exciting,

but we are slightly encouraged

because obviously it gives managers

like ourselves confi-dence in other

areas. Emerging mar-ket debt is a

very useful diversifier because it’s

got a broad universe, it’s got lots of

countries and regions, obviously the

various grades and it’s got a lower

correlation to other asset classes

and so, as a diversifier, I think it’s got

its high points.

Cusack: I’m excited by it, partly

because everyone has intuitively

thought there’s equity and accept

that with equities you get volatility,

whereas with pension schemes you

often think about debt instruments

anyway. So I think it’s quite nice that

there is this additional opportunity

available, whether or not it is used by

pension schemes. It could be a very

good diversifier so it needs to be

considered in equal priority as

emerging market equity. I think they

should both be considered quite

actively by trustees.

Corominas: Duration was actually

one of the elements that helped last

year in emerging market invest-

ments, so any investor with a local

currency debt exposure with some

duration did well, or at least helped

offset some of the losses elsewhere.

It is important to remember that

most of these countries did not issue

significant debt bought by inter-

national investors in their own local

currencies, say, 10 or 15 years ago.

Now, internationally, 85 per cent of

the debt that investors can buy in

these countries is local currency,

that’s been a huge boon for emerg-

ing markets. They have now reduced

their, effectively, interest rate risk,

currency mismatch risk and dura-

tion risk so they depend less on the

Fed and the interest rate cycle

globally. In essence, they can pretty

much set their own monetary policy.

That’s great news for investors

seeking to diversify and capture

significant yield outside of developed

markets.

Datta: Can I just inject one note of

caution? Basically clients are looking

for income, they’re looking for diver-

sification, and so emerging market

local currency debt appears to meet

some of those requirements. The

issue is in terms of trying to work out

what your expected returns are,

because when you look at yields,

you’ve got to allow for the fact that

some of the debt is not going to

perform and so you’ve got to make

allowances for that. You’ve then

got to consider what the potential

currency return is over your invest-

ment horizon. You’ve got to take into

account the fact that by and large

when things turn less market

friendly, investors head for the exits.

There has been much more foreign

investment so it’s become more

internationalised in the last three to

five years. So in some sense the

correlations with other markets are

now higher with local currency debt

than they used to be. So you’ve

lost the benefit of the early stage

honeymoon period when it was

still uncorrelated, though its not quite

as bad as equities. Factoring all this

in, it looks reasonable but it’s difficult

now to make the case that this is

a very compelling story in terms

of outright returns to us. It only

looks ok. We like the fact though

that opportunities are expanding,

because managers are finding all

these new bonds to play with and

the duration and currency aspects

allow more room to add value. But

in terms of market returns, it isn’t

quite as good. It compares well with

gilts and US treasuries, but then

everything does.

Frisby: We do hear that corporate

governance is improving both on

the ground for individual companies

and disclosure and also in terms of

countries starting to sign up to inter-

national accounting standards which

is a good thing, but what is your

general feeling about corporate

governance and how do you address

those when a manager is actually

managing assets on the ground?

Mattiko: When people tar the

whole market with the same brush

that leaves a lot of interesting oppor-

tunities for me, when I can differen-

tiate between where somebody

42_49_EM_roundtable.indd 8 3/28/2012 9:57:27 AM



49

says ‘well there might be a corporate

governance risk and we’re giving it a

big discount because emerging

markets and corporate governance

risks, particularly overseas listed

Chinese stocks which is the only

way to play China, you can find a lot

of interesting opportunities’. But

having said that, for financial mar-

kets in a place like China capitalism

as a concept is very young, so

we’re in the learning phase. They’re

coming very steeply up the learning

curve and any time that is the case,

you’re going to have these myriad of

issues with corporate governance in

China and I think that people should

expect that. That’s a reason why

emerging markets should and do

have a higher beta than the rest of

the world. Flows is one reason, but

corporate govern-ance is another

reason that it is a riskier asset class.

Part of that is the corporate

governance, but there are varying

degrees of corporate governance.

South Africa has far superior

corporate governance, far better

shareholder friendly culture than

China, than Russia, as examples. So

within emerging markets there’s a

big degree of differentiation.

Cusack: Do you think there’s a

different level of acceptance of

corporate governance based on the

sector you’re in?

Mattiko: Yes, most certainly. One

thing we’ve seen is anything to do

with agricultural assets in China, and

I realise that’s a very small slither, but

there are a number of companies

within this sector that are very

susceptible to corporate governance

risk. If you were to look at another

sector, say beer stocks in China,

there’s very little corporate gover-

nance risk. There is, if you look at

specific verticals within markets, be

it regional or industry or regulatory,

there’s definite degrees of corporate

governance risk.

Frisby: It’s said that one of the

most investor friendly things to do in

emerging markets is to pay a good

steady dividend.

Cusack: Can I just add to the

corporate governance talk, one of

the things that we do tend to ask our

managers when we are interviewing

them is what do they do about

investigating corporate governance?

How do they keep an eye on them?

What checks and balances do they

have? Because I think trustees

nowadays do have an obligation to

be aware of where they are investing,

and so to say ‘oh we didn’t realise

we are investing in Russia’ doesn’t

work, because we do have to

challenge and find out. We don’t

have to make the decisions, but

there has to be transparency and

we should ensure that we know

there are checks and balances

being done.

Frisby: Looking forward to 2012,

are you all optimistic about the pros-

pect of investment in an emerging

market, be it equities or debt relative

to home markets? Is that something

that, say, if you were an asset allo-

cator you’d be overweight, random

weight or relatively neutral?

Datta: With equities, the relative

valuations of emerging markets

even after the last six week rebound,

is still better than 12 or 18 months

ago. Particularly in respect of price to

book ratios which were 20 per cent

above developed markets, whereas

today they are below. There has

in effect been relative under-

performance by emerging markets

for over a year, which explains the

valuation correction implying some

valuation support. If we look at debt

then currencies have again re-

bounded, but are more attractively

valued than a year ago. Emerging

market hard currency debt, that’s

more of an issue of US yields and

current spreads are not particularly

attractive. Still, the relative to devel-

oped markets valuation picture is

better than it was 12 months ago.

The problem is that valuations

are not everything and in current

conditions I think we’re still a bit

cautious about whether emerging

market assets can really pull through

and outperform the developed

markets at this point, given global

uncertainties and some risk aversion

out there. It’s difficult for us to wave a

magic wand to ensure that emerging

markets have a very strong year.

O’Malley: Emerging markets are

clearly, to us at least, the main

growth area, despite 2011. There’s a

number of things that speak to that

in terms of China’s ability to grow,

going forward. There are niche areas

in Latin America that we like and

from an overall perspective, because

we tend to look at it as a global piece,

developed and emerging, revenues

versus domicile, we think it’s the

area where there’s going to be most

growth, particularly on the equity

side over the next two to three years.

I mean there’s going to be risk on,

risk off for a while and it’s going to

affect emerging markets the same, if

not more, in terms of volatility, but if

you can put up with that, and look

beyond three month periods, then

we think there’s every expectation

that returns can be good.

“If you look at specific verticals within markets, be

it regional or industry or regulatory, there’s definite

degrees of corporate governance risk”


emerging markets: the best approach · show that decoupling in a very modern, very integrated...

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