Allianz CIO advocates new notion of ‘risk’ for EM investing
The accepted notions of ‘risk’ many allocators use when investing in emerging markets is antiquated, says Andreas Utermann, global chief investment officer of Allianz Global Investors.
While investors still require an added risk premium for investing in developing markets, Utermann said “in relative terms you are definitely improving diversification by going there”.
He conceded levels of transparency and governance are not as good in some emerging markets as they are in the developed world, “but who would have thought that Greece would cook its books [to qualify for Eurozone membership]?”
Utermann (pictured) also acknowledged there is “no such thing as outright ownership of property in China”, before adding, “If you look at what the French government is proposing [taxing salaries at 75% above €1m] and the UK tax rates, what else but appropriation is that”
Utermann pointed to other risks in emerging markets, of cash outflows as investors, worried about the growing crisis in OECD nations, repatriate money. However, recently it has been Greece and Spain suffering a drain from their banks.
Utermann said foreigners withdrawing cash from EMs would be a benefit to the remaining investors “because you would not get the large swings in markets that brings”.
He said downdrafts in EMs now are buying opportunities, pointing to the fact EM currencies bounced back in two years after falling by up to 50% in Asia’s financial crisis.
AGI’s EM portfolios have annual turnover averaging 30%, so can benefit from longer-term trends, he said. “People who are trading more often because of their character are overdoing it.”
However, Utermann said it would become more difficult for defined benefit pensions to justify investing in risk assets as their liability profile decreases.
“If you run simulations of returns of particular asset classes the time horizon to justify investing in some risk assets has been extended, because returns over the last 15 years have not been that good.”
He said it was important nevertheless for long-term savers to shift investments out of bonds, often losing money in real terms, and into equities.
“Investors may buy fixed income instruments with the money they have put away to save for the long term, and they live with the fact they may not be paid back their principal. If the average yield on the portfolio is 3.5% and interest rates go to 5%, the value of the portfolio drops by 15%.
“But if you take an equity portfolio with global brands with a dividend yield of 3.5% and potential for growth, why is it difficult for people to take the money and put it in the equities for five years – which is the average yield on the bond portfolio – and say they have a higher yield, and in five years the chances are they will get their principal back, too?
“Why should people be more worried about equity volatility than bond volatility if the purpose of the money is the same?”
He says it is partly because people perceive equity and bond volatility differently.
“Equities become an object of speculation and trading. But people need to stop thinking about equities in terms of trading.”