Emerging markets still more risky
Emerging markets have not ‘emerged’ in relation to the developed markets, says John Pollen, head of global emerging equity, Pioneer Investments.
The perception that the global financial crisis in the developed world had allowed the EM markets to ‘emerge’ is mistaken, says Pollen. One of the hallmarks of the EM markets “is indeed their perceived riskiness or volatility.”
Emerging market economies have enjoyed high growth rates but the risks traditionally associated with investing in EM remain. He says: “As EM countries become wealthier, the spread of wealth is likely to remain uneven and this can lead to social unrest and justifiable claims of corruption.”
Other factors that have marked out the emerging markets include lack of transparency, weak rule of law and fragile financial systems. Emerging markets continue to suffer from these weaknesses.
Pollen says: “In these respects we would regard EM as more risky and volatile during times of global financial uncertainty, despite, or even because of their fats growth.”
However, he says, “in one crucial respect, EM are less risky: their burden of debt is considerably lower than is the case for the US, Japan or Europe.”
The risk of fiscal and policy errors is also high, particularly in the US and Europe, but a slowdown in global trade and rising inflation would have a negative impact on export-led countries, such as Korea and China.
Consequently, says Pollen, “the focus of our equity funds has been more on domestic consumer-related businesses, rather than on export-dependent companies, as well as on companies where profit margins are more assured.”
Pollen maintains a bias towards Asia, while remaining neutral to underweight in EMEA and Latin America. He adds: “India is less exposed to the global cycle thanks to its relatively low export ratio.”