Focus on emerging markets – A new look at emerging markets

For a while earlier this year it appeared that emerging markets would pull the global economy through the slump suffered by developed markets. But with growth slowing, a new approach is needed. Caroline Allen reports.

The slowdown in developed markets, and particularly the Eurozone crisis, is affecting not only how emerging market fund managers shape their portfolios, but asset management firms’ whole approach to the asset class.

Existing ranges of emerging market equity funds are looking a bit staid as providers start to offer more specialist sector, theme, debt or currency funds which all claim to satisfy investors’ need for income.

There has been a stream of debt, currency and corporate bond funds from JPMorgan Asset Management, Morgan Stanley, Baring Asset Management, and T Rowe Price, among others, in recent months.

An asset class once seen mainly as a beta play is becoming more complex, allowing alpha generating managers to shine, with a more sophisticated product range evolving.

The number of emerging market hedge funds is rising again. Assets under management are now comfortably over $200bn, and emerging markets derivatives are adding to the depth of the markets.

The emerging sovereign debt market has been overtaken by corporate issuance, which is growing at double digit rates annually and now rivals the size of the US high yield market.

Emerging market corporate bonds offer more direct exposure to the local economic growth than sovereign bonds. They also give access to rising domestic consumption, with less volatility than emerging markets stocks.

In the equity space, Mark Mobius set a marker for the region when Franklin Templeton launched a new Africa fund for him in April. But equity investing in most emerging markets is a well-worn trail.

But there are new opportunities. Private equity players have been quick to fill the gaps opened up by the exodus of foreign institutional or private investors who have needed to meet cash calls at home.

Cordiant Capital, the world’s largest provider of private loans to emerging markets, notes that because of the capital requirements of Basle II, and the enduring Eurozone crisis, Western banks are cutting down on long term loans to emerging markets.

This is encouraging private loan providers who can achieve higher returns because the new loans are at far higher margins than before the credit crunch.

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