Dubai: With a few rate hikes on the horizon in the United States, investors are urged to look at undervalued equities focused on domestic consumption in emerging markets and debt instruments even as investors become edgy about investing in export oriented companies.
Fund managers expect an end to the 35-year bull run in bond markets and 9-year continuous rally in US equities, and so they are shifting focus to a portfolio which is a mixture of corporate bonds, sovereign dollar bonds, government dollar debt and sovereign local currency bonds and equities in emerging markets.
“Historical perception of emerging market has been always commodities driven, dollar driven, and that was true in the late 80s. As time has gone on, it has moved completely away from materials and energy to consumer discretionary and technology,” Dorian Carrell, Portfolio Manager/Analyst Convertibles at Schroders told Gulf News.
“It’s no longer a call on the ability of countries to export to the US either commodities to China, but it’s a call on internal consumption, which is building up,” Carrell said.
Their multi-asset portfolio, which has $550 million (Dh2.08 billion) in assets under management, is skewed to Asia in which the fund has about 73 per cent, 15 per cent in Europe, and 13 per cent in Latin America.
The fund manager is overweight on Chinese banks and second tier tech companies. It is also overweight on Korea and on Russia due to rising oil prices.
Emerging markets had a rocky 2015, and then witnessed a bounce back in 2016, but developed markets especially the US have been on a gaining streak in the past nine years. In 2017 alone, the MSCI emerging market index jumped 68 per cent compared to 25 per cent gains in the Dow Jones index.
“Equities in emerging markets are cheaper relative to their own history and relative to their growth prospects. We tend to look at forward price earnings. The earnings growth is much faster in the US, but the price run is much lower. There is a discount to 25-30 per cent to developed markets. So it does not make sense either historically or relative to its growth prospects,” Carrell said.
“The US cycle has been going on since the past 9 nine years, and its coming to an end. It’s not money moving out of developed markets in a blanket way and moving into emerging markets, people are considering moving between the asset classes and they are looking in areas for what can still grow and which has value, and clearly emerging markets have both growth and value,” he added.
- Nisarg Trivedi | Director at Schroders
Diversify
“Still we see a huge allocation to fixed income. In an environment where we have a potential 3-4 rate rise, it’s not going to be a sensible investment for them. There are pockets of fixed income that offer value. There are opportunities available in emerging market debt,” Nisarg Trivedi, director at Schroders said.
Schroders has positioned itself in emerging market debt in local currencies.
“We are skewed towards investment grade in Asia, and their interest rates sensitivity is lower than the US, but they still offer yield spreads.
Emerging market local is very popular at the moment,” Carrell said.
The fund manager is positive on short-dated bonds than the benchmarks, which are much less than a 4-year duration. “The short-end of the curve in emerging market dollar is inefficient so it gives us a spread pickup and you have very little interest rate sensitivity,” he added.
- Dorian Carrell | Portfolio Manager, Analyst Convertibles at Schroders
In all, diversification is the name of the game.
“You are under lower risk by investing in equities because we may have 3-4 interest rates rises this year. Diversification of portfolio is the need of the hour. Clients have started understanding that and they are moving away from a bond centric portfolio to a good diversified universe, and a good way to do that is through a multi-asset,” Trivedi said.
