Emerging markets seeing a shift in confidence underway

Australian investors have traditionally shied away from emerging market investments because developed country markets offered competitive returns.

Emerging markets picked up speed in September, but investors still remained wary of the prospect of investing in an ‘undeveloped’ economy.

Since then, the market has seen a shift in investors’ attitudes towards investing in ‘growth’ markets.

According to the BlackRock Investment Institute’s October Exchange Traded Products (ETP) landscape report, Australian investors ‘embraced’ emerging market bonds and equities in October.

An increased appetite for risk also contributed to year-to-date ETP flows of US$192.3 billion, which surpassed 2011’s full year total of US$173.4 billion. ETP flows in October were US$9.5 billion.

Within emerging market equities, China’s exposures took the lead followed by broad emerging market ETPs.

“Global trends identified in the report are being broadly echoed in Australia,” iShares Australia head Mark Oliver said. “Local ETPs are a fast-growing investment product category, having recorded more than 20 per cent growth in Australia so far this year.

“Like their overseas peers, Australian investors are using ETPs strategically as well as tactically in portfolios.”

Tyndall Asset Management (Tyndall AM) has also warmed to the prospect of long-term investment in emerging markets, forecasting a “solid growth story”.

“There is a lot of growth that is not driven by any one component,” Tyndall AM’s head of multi-manager, Ken Ostergaard, said. “It is very broad. We are definitely very pro-emerging markets.”

Low trading equities, he added, have created a relative valuation gap which has expanded between equities and bonds, benefiting emerging markets.

“We have experienced some shift from fixed income into some of our equities products; we think that will continue,” Ostergaard said. “When it does really happen, you [will] get some of these big uncertainties out of the way.

“We think it’s getting closer to the point where there will be quite a lift-up in emerging markets.”

New players in the emerging market space are now beginning to appear, including Capital International and BT Investment Management (BTIM), which have both launched emerging market funds in response to demand.

BT Investment Management (BTIM) launched its BT Global Emerging Markets Opportunities Fund on 13 November, as ifa was going to press.

Emerging market shares will be managed by London-based active equity investment firm J O Hambro Capital Management (JOHCM), which was acquired by BTIM in October 2011.

“The fund’s aim is to access the growth profile in emerging markets, but it’s particularly interesting this time when there is such a lack of growth in the developed world,” JOHCM fund manager Paul Wimborne said. “Worldwide, investors are continuing to look for growth and emerging markets is one area where the opportunity is still present.”

The BT Global Emerging Markets Opportunities Fund aims to provide a return – before fees, costs and taxes – that exceeds the MSCI Emerging Markets Standard Index (Net Dividends) in Australian dollars over the long term.

Similarly, responding to demand for a less volatile and more flexible investment strategy for emerging market opportunities, Capital International has launched an Australian fund version of its emerging markets total opportunities (ETOP) strategy.

“By 2025, about 50 per cent of the world’s GDP – and the real growth over that period of time – is forecast to come out of the emerging market regions,” Capital International’s head of Australia, Paul Hennessy, said.

“What we’re aiming to provide is a much smoother ride through that investment period.”

The new strategy will be the company’s main focus in the medium term, but there are also plans to launch a fixed-income solution in early 2013 to complement the fund.

This fund, which aims to capture emerging market growth opportunities while dampening volatility, has the flexibility to invest in a broad range of traded securities from over 60 developing countries.

Capital International ETOP portfolio manager Shaw Wagener said the company sought long-term growth and capital preservation but with “lower volatility of returns than emerging markets equities”.

“We came up with the idea for ETOP after talking with investors who told us that they wanted exposure to emerging markets, but without having to endure high volatility,” Wagener said. “We concluded that to do this, we needed to create an investment strategy with great flexibility, as well as a process to manage that flexibility.”

 

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