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Why you shouldn’t give up on emerging markets
(Pictured: Gorky Urquieta)
by Penny Pryor
There are still opportunities in both emerging market debt and emerging market equities according to portfolio managers at global fund manager Neuberger Berman.
In Australia recently to meet with clients, co-head of emerging markets debt, Gorky Urquieta, said that the team did not really subscribe to the view that there had been a breakdown in emerging markets.
Although the gap between developed countries’ economic growth and emerging market growth has started to narrow, factors such as strong fiscal balances and low government debt, still work in the emerging markets favour.
The recent recovery in those developed countries has also helped emerging markets.
“This is mostly a developed market-led recovery,” Urquieta said. “Mostly [led by] the US, but also the Eurozone which has ceased to be a drain on global growth and is becoming an engine.”
Neuberger Berman offers a blended debt capability, which is split evenly between local currency emerging market debt and hard currency (in US dollars or euros) EM debt.
The chart below shows where that fund fits on the risk return spectrum.
Source: Neuberger Berman
“So when we compare to US grade corporates, the story is pretty supportive of emerging markets,” Urquieta says.
Flows into emerging market debt have suffered on the back of the tapering of quantitative easing talk but the fund manager predicts this will be a short-term trend.
“Investors are going to have much bigger allocations to emerging market debts [in the future] than they do today,” Urquieta said.
Over all the market is “not too hot, not too cold” and Neuberger Berman has a slight bias to local bonds, relative to hard currency bonds, within the strategy.
Emerging market equities should also offer some upside, compared to developed-market equities, according to Conrad Saldanha, portfolio manager, emerging markets equities.
“EM is looking a better opportunity set from an equity investor standpoint,” he said.
And investors need to stop worrying about the Middle Kingdom.
“I think the obsession needs to move away from China growth,” Saldanha said.
“EM offers good long term-term opportunity.”
When it comes to individual securities, both managers prefer to focus on the domestic side and micro factors.
“GDP growth is not the best indicator for stock market returns,” Saldanha said.
“That’s why we are focused on the domestic side. Small and midcap – that’s where we find a lot of opportunity in emerging markets,” he said.
That kind of research requires significant resources and employee-owned and controlled Neuberger Berman has close to 2,000 professionals at 16 offices across the globe.
Lucas Rooney, managing director in Australia, says the company has 43 separate investment teams and is 93 per cent owned by investment staff with a target to shift that to 100 per cent by next year.
“We rarely lose investment staff,” he said.
And indeed the company boasts an employee retention rate of 98 per cent over the last six years.
“I think that’s a standout statistic for us,” Rooney said.
The firm currently does not have an Australian equities capability but would add one if it came across the right team and has had discussions with Australian equity professionals in the past.
