Financil News
Jason Corcoran
24 August 2009
UK consultants advise clients to invest up to 15% in emerging markets
Emerging markets have finally gone on the pension scheme radar as the stock market boom in China and India outpaces the recovery in the west. While developed world equities have advanced by 15% this year, markets in China, Russia and India have clocked up 44%, 52% and 61% respectively.
In the absence of economic growth, western markets are starting to acquire some of the dysfunctional characteristics of developing countries, as governments agonise over the future.
Figures from global fund tracker EPFR show dedicated emerging-market equity funds took in $1.6bn (€1.1bn) in the first week of August, bringing total year-to-date inflows to $36.1bn.
Investor demand for emerging market bonds means the cost of insuring against debt defaults has fallen below western governments for the first time. Russian default swap prices, for example, have fallen to 255 basis points, or 20 basis points less than those linked to California.
Investment consultants in the UK remain cautious but none the less they are advising pension fund clients to invest up to 15% of their portfolios in emerging markets through equity, debt, currency, swaps and other strategies.
Hewitt Associates recommends that schemes should invest a maximum of 10% in emerging markets. Consultant Tapan Datta said: “The general fear factor associated with emerging markets has diminished. Their debt and equities are now on a par with developed markets.” Mercer recommends a 10% to 15% exposure and advises schemes to tap into the skills of specialist managers rather than broadening the remit of global teams.
Deborah Clarke, a principal at Mercer, said there was evidence that money has been switched out of UK and US equities into global and emerging market mandates.
She said: “We are seeing global and emerging market mandates picking up this year after going very quiet in 2008. A number of global equity managers are broadening their mandates.”
The risk aversion of pension fund trustees has historically been a factor working against increased asset allocation to emerging countries. The repeated occurrence of financial crises in countries such as Argentina, Mexico and Russia heightened perception that emerging markets were excessively volatile.
In the past, schemes in the UK and the US have viewed emerging markets as deserving their own asset class. They were seen as a sub-component of global equities, within Morgan Stanley’s All Country World Index for equities or Citigroup’s World Government Bond Index for bonds.
The upheaval in developed markets over the past two years and the reduced contagion to emerging economies suggests a greater migration of capital from the West is under way.
Mark Humphreys, a member of Schroders’ Strategic Solution group, said: “Pension funds should look at emerging markets more closely. They represent 12% of the MSCI all countries index and we expect that to increase.”
Asset managers and investment banks have been positioning themselves to benefit as emerging markets recover more quickly from the global economic crisis.
A survey by Bank of America Merrill Lynch published last week showed a net 52% of fund managers wanted to be overweight developing economies.
UK-headquartered bank Standard Chartered has raised £1bn (€1.1bn) to allow the group to expand in Asian markets. Standard chief executive Peter Sands said the group believes Asian markets will benefit from a faster recovery than the west.
Fund manager Mark Mobius plans to double Templeton Asset Management emerging-market assets to $50bn within two years. China is the top Mobius pick. Other managers see the country as a catalyst to a global recovery.
Jerome Booth, head of research at Ashmore Investment, has caused waves with his recent suggestion that investors should increase their level of exposure to emerging markets to between 35% and 50% based on the share of global GDP.
Long-only managers and emerging market specialists said Booth’s allocation is excessive and would blow a hole in pension scheme risk budgets.
Bill O’Neill, a portfolio strategist at Merrill Lynch Global Wealth Management, said: “Fifty per cent is way beyond what funds should be putting in. We think 12% should be a starting point. The story is right but the key problem is that the opportunity was more compelling early in 2009 when emerging markets were seriously undervalued.”
Aviva Investors supports Booth’s views in terms of how he has highlighted the potential for emerging markets, relative to developed markets, to contribute more substantially towards portfolio outperformance.
It believes that as emerging markets are growing, developing and arguably maturing, investors need to take a more sophisticated approach to tapping main growth markets.
Instead of allocating on a country or regional basis, Aviva makes the argument for using different emerging market styles. Aviva recently reorganised its emerging markets team on this basis, and instead of having regional experts it has managers dedicated to emerging macro, emerging special situations, emerging small cap, and so on, with the aim of delivering greater alpha.
Baring Asset Management is cautious on developed markets. Percival Stanion, head of asset allocation at Baring, said pension schemes should be downsizing their structured weightings to developed markets.
He said: “The industry is seeing a big ramp-up in searches and appointments in the UK and the US for emerging markets mandates. We have about 25% of our portfolio invested in emerging markets, which would be considered aggressive elsewhere.”
Baring stresses that emerging market portfolio exposures should depend on client risk appetites. But it believes investors’ allocation to emerging markets should, on a long-term strategic basis, be about 20%.
In multi-asset portfolios, Baring can argue that you need an investment manager that can tactically manage this exposure to emerging markets as conditions dictate, rather than maintaining a certain level of exposure at all costs.
Jonathan Harrison, global head of research at UBA Capital, the investment arm of the United Bank for Africa, recommends pension funds commit 40% to emerging economies.
He said: “Developing markets are, almost by definition, growth leaders and therefore more attractive investment destinations than developed markets. The global crisis has not altered the fundamental thesis but has illustrated that it is not only developing markets that are prone to periodic economic earthquakes.”
Swiss private bank Lombard Odier Darier Hentsch said allocations stretching to 50% are neither realistic nor pragmatic. Curtis Butler, head of emerging market equities at Lombard, said many inflows were a reaction to the correction from last year’s slump.
He said: “We believe in gradually increasing exposure. Emerging markets have not yet achieved the stability on an annualised basis. We need to see another decade of stability. There are still those who see emerging markets as a fair-weather friend but they have not yet learned to have them as a permanent place in their portfolios.”
Showing posts with label emerging markets. Show all posts
Showing posts with label emerging markets. Show all posts
Saturday, 19 September 2009
Sunday, 22 February 2009
Russia’s market freeze takes country closer to Bric exit
Financial News
Jason Corcoran in Moscow
16 February 2009
Falling trading volumes and low liquidity are forcing managers to desert
Temperatures as low as minus five degrees Celsius last week gave fund managers a ready-made excuse for turning their backs on Moscow and finding somewhere warmer. But Russia’s rapidly freezing stock markets had rather more to do with the decision of James Fenkner, founder and managing partner of Red Star Asset Management, to move his fund’s operation to Los Angeles this month. Illiquidity has become the order of the day in Moscow-quoted equities.
Jim O’Neill, head of global economic research at Goldman Sachs, raised the possibility last month that Russia could be dropped from the Bric grouping, only to dismiss it.
Fenkner cited family reasons as his main motivation to relocate, and the fact that his seed investor, Austria’s Erste Bank, pulled its mandate, but he also depicted a market suffering from declining corporate disclosure and crumbling market infrastructure.
He said: “On the business side, Russia has become a pure macro play. Over the past year we have moved most of our portfolio into American and global depositary receipts due to a combination of value and liquidity and we really get active around 5:30pm when London and US open. Micex and most of the local share stories are a joke.”
The worsening economy and the slide in the price of oil has spurred investors to pull $290bn (€226bn) from the country since the end of July, according to French bank BNP Paribas.
Hedge funds and long-only vehicles focused on Russia began switching their focus to trading ADRs and GDRs in London and New York after Russia’s five-day war with Georgia in August. Damaging corporate disputes at miner Mechel and the Anglo-Russian joint petroleum venture TNK-BP shook the domestic markets and exacerbated the investor exodus.
Further market instability, fuelled by falling commodity prices and a weakening rouble, has led to 30 trading suspensions on the Micex stock exchange. Micex has shed 50% of its value, while its dollar-denominated rival RTS has fallen by 75% from its highs last year. The Russian RTS index was the worst performer last year after Ukraine and Iceland and came close to equalling the 85% drop experienced during Russia’s sovereign default in 1998.
Daily trading volumes in Moscow dropped off sharply from $7bn early last year to $2bn by the end of the year, which is on a par with trading volumes of 2003.
O’Neill, who popularised the term Bric as a moniker for Brazil, Russia, India and China, raised concerns about Russia’s over-reliance on oil and its poor corporate governance. Its share index has fallen far behind that of Brazil, the other net exporter of natural resources of the four.
Russian public companies are trading at the price/earnings ratio of three, whereas the ratio in January last year was 11. The average p/e ratio of emerging markets was nine and developed markets was 12 at the end of last year.
One of the results of the fall has been to drive trading back to London. Before the meltdown, analysts at Renaissance Capital estimated Moscow had 70% of equity trading volumes against London’s 30%. Renaissance said the ratio last month was 50%-50%.
Alexander Kotchoubey, head of international development for Russia and eastern Europe at Swiss private bank Lombard Odier Darier Hentsch, said the preference for GDRs and ADRs reflected the realisation that the Russian market possesses little depth or companies that offer diversification. He said: “You have to wonder why one needs to take the risks associated with local markets’ liquidity and closures when similar returns can be had through GDRs and ADRs but with a lot less hassle.”
Hedge funds operating throughout Russia and the Commonwealth of Independent States are cutting their staff and slashing costs in response to market falls and increases in client redemptions.
The closure last year of the Florin FSU Credit Opportunities fund, which was invested in real estate and equity collateralised debt, led to 10 lay-offs at the firm in Moscow and London.
Da Vinci Capital Management’s special opportunities fund, which invested in Russian equities, has bee restructured because of too little assets.
Other funds, including Denholm Hall Russian Arbitrage fund have announced they are considering a restructuring following difficulties.
East Capital Asset Management, which maintains a large investment team in Moscow, has been forced to begin trading more in London because of trading problems. The Swedish firm, which has about $1.5bn invested in Russia and eastern Europe, has cut 40 jobs from its base in Stockholm and from other centres such as Moscow. Peter Elam Hakansson, founder of East Capital, listed falling oil prices, a weakening rouble, corporate governance and financial market regulations as four reasons for Russia’s cheapness.
In a letter to investors, Hakansson wrote: “It is difficult for Russia to influence the first two factors, but the remaining two are even more important for the country to focus on. Corporate governance is once again in the spotlight, after the autumn saw some dubious interpretations of what is right or wrong according to Russian legislation.
“And lastly, financial market regulations have been making the news after the markets on occasions were shut down in such a way as to baffle observers and appear over-dramatic.”
Russia falls away from Brazil
Jason Corcoran in Moscow
16 February 2009
Falling trading volumes and low liquidity are forcing managers to desert
Temperatures as low as minus five degrees Celsius last week gave fund managers a ready-made excuse for turning their backs on Moscow and finding somewhere warmer. But Russia’s rapidly freezing stock markets had rather more to do with the decision of James Fenkner, founder and managing partner of Red Star Asset Management, to move his fund’s operation to Los Angeles this month. Illiquidity has become the order of the day in Moscow-quoted equities.
Jim O’Neill, head of global economic research at Goldman Sachs, raised the possibility last month that Russia could be dropped from the Bric grouping, only to dismiss it.
Fenkner cited family reasons as his main motivation to relocate, and the fact that his seed investor, Austria’s Erste Bank, pulled its mandate, but he also depicted a market suffering from declining corporate disclosure and crumbling market infrastructure.
He said: “On the business side, Russia has become a pure macro play. Over the past year we have moved most of our portfolio into American and global depositary receipts due to a combination of value and liquidity and we really get active around 5:30pm when London and US open. Micex and most of the local share stories are a joke.”
The worsening economy and the slide in the price of oil has spurred investors to pull $290bn (€226bn) from the country since the end of July, according to French bank BNP Paribas.
Hedge funds and long-only vehicles focused on Russia began switching their focus to trading ADRs and GDRs in London and New York after Russia’s five-day war with Georgia in August. Damaging corporate disputes at miner Mechel and the Anglo-Russian joint petroleum venture TNK-BP shook the domestic markets and exacerbated the investor exodus.
Further market instability, fuelled by falling commodity prices and a weakening rouble, has led to 30 trading suspensions on the Micex stock exchange. Micex has shed 50% of its value, while its dollar-denominated rival RTS has fallen by 75% from its highs last year. The Russian RTS index was the worst performer last year after Ukraine and Iceland and came close to equalling the 85% drop experienced during Russia’s sovereign default in 1998.
Daily trading volumes in Moscow dropped off sharply from $7bn early last year to $2bn by the end of the year, which is on a par with trading volumes of 2003.
O’Neill, who popularised the term Bric as a moniker for Brazil, Russia, India and China, raised concerns about Russia’s over-reliance on oil and its poor corporate governance. Its share index has fallen far behind that of Brazil, the other net exporter of natural resources of the four.
Russian public companies are trading at the price/earnings ratio of three, whereas the ratio in January last year was 11. The average p/e ratio of emerging markets was nine and developed markets was 12 at the end of last year.
One of the results of the fall has been to drive trading back to London. Before the meltdown, analysts at Renaissance Capital estimated Moscow had 70% of equity trading volumes against London’s 30%. Renaissance said the ratio last month was 50%-50%.
Alexander Kotchoubey, head of international development for Russia and eastern Europe at Swiss private bank Lombard Odier Darier Hentsch, said the preference for GDRs and ADRs reflected the realisation that the Russian market possesses little depth or companies that offer diversification. He said: “You have to wonder why one needs to take the risks associated with local markets’ liquidity and closures when similar returns can be had through GDRs and ADRs but with a lot less hassle.”
Hedge funds operating throughout Russia and the Commonwealth of Independent States are cutting their staff and slashing costs in response to market falls and increases in client redemptions.
The closure last year of the Florin FSU Credit Opportunities fund, which was invested in real estate and equity collateralised debt, led to 10 lay-offs at the firm in Moscow and London.
Da Vinci Capital Management’s special opportunities fund, which invested in Russian equities, has bee restructured because of too little assets.
Other funds, including Denholm Hall Russian Arbitrage fund have announced they are considering a restructuring following difficulties.
East Capital Asset Management, which maintains a large investment team in Moscow, has been forced to begin trading more in London because of trading problems. The Swedish firm, which has about $1.5bn invested in Russia and eastern Europe, has cut 40 jobs from its base in Stockholm and from other centres such as Moscow. Peter Elam Hakansson, founder of East Capital, listed falling oil prices, a weakening rouble, corporate governance and financial market regulations as four reasons for Russia’s cheapness.
In a letter to investors, Hakansson wrote: “It is difficult for Russia to influence the first two factors, but the remaining two are even more important for the country to focus on. Corporate governance is once again in the spotlight, after the autumn saw some dubious interpretations of what is right or wrong according to Russian legislation.
“And lastly, financial market regulations have been making the news after the markets on occasions were shut down in such a way as to baffle observers and appear over-dramatic.”
Russia falls away from Brazil
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