China and Asia, object of desire of investors

Always with the purpose of providing diversity to the portfolio, but the truth is that in recent months the gaze of investors has returned to emerging markets, especially towards China, the country that has undertaken the recovery before, and the Asian continent , mainly the southeast.

Behind the bets on these areas of the world, the growth prospects: 8.6% for Asia and 8.4% for China in 2021, according to the IMF, an organization that estimates minor increases for other large regions: the 6 .4% for the United States or 4.4% for the euro zone. Growth that is reflected in the returns of the best investment funds (see tables).

“We know from recent economic cycles that emerging markets can remain bullish for a long time if good macroeconomic fundamentals hold. In fact, these economies are historically twice as sensitive to a recovery in world trade,” says Luca Paolini, chief strategist at Pictet AM.

At Pimco they are also aware that capital flows to emerging markets tend to accelerate after global recessions, but this time they believe that, given the backdrop for 2021, although it is not without risks, it has the potential to establish "a real record”, they observe. Among the reasons, the forecast of a strong synchronized recovery around the world and the solid growth of production at the global level.

According to Xavier Hovasse, head of emerging market equities at Carmignac, the catalysts in the short and medium term for these markets are better management of Covid "especially in China and Asia", the rebound in economic activity with the increase in exports from emerging markets and the increase in the prices of raw materials, the improvement in macroeconomic fundamentals and the depreciation cycle of the dollar.

"We would opt for the Asian region as a universe to identify the best investment opportunities, both from the point of view of fixed income and variable income," says Dídac Pérez, director of investments at Caja Ingenieros Gestión, who observes that in the region There are three major trends that will support high growth rates in the future: demographic growth, social movements and urbanization processes, and the digital transformation of society. And he gives an example of the magnitude of the opportunity: "Currently, Asia as a whole accounts for 60% of the global population and 34% of GDP, although only 21% of the world's stock market capitalization."

The continent brings together 60% of the population and 34% of world GDP

In Edmond de Rothschild AM's emerging markets fund team, in addition to China, they are supporters of India. "The vaccination process is going well and the country unveiled, in early February, a very growth-friendly budget for the next fiscal year, with $500 billion to be spent by the local government."

Warren Hyland, portfolio manager at Muzinich & Co., recalls that many of these countries "are manufacturers, not service providers," and now global trade is expanding, "which gives us the opportunity to invest, for example, in companies linked to raw materials in Latin America and Africa. We also see opportunities in the Middle East, which we hope will be one of the first regions to recover due to its successful inoculation programs against Covid-19.”

China y Asia, objeto de deseo de los inversores

Experts warn that making tactical bets in emerging markets is even more dangerous than in developed countries since there are abysmal differences in terms of growth rates, demographic dynamics, fiscal and monetary policies, depth and liquidity of their markets or solidity of institutions, and in some markets it is even difficult to operate.

"The good thing is that the selection work has already been done by the indices that take into account a multitude of factors when assigning weights," Francisco Quintana, director of investment strategy at ING, congratulates. For example, the MSCI Emerging Markets assigns a weight of 40% to China and another 30% divided between South Korea and Taiwan. “They are a good starting point. All these countries have excellently managed the pandemic and are already in full recovery”, assures the ING expert.

Likewise, Sebastián Larraza, head of fund selection and multi-profile management at Andbank Wealth Management SGIIC, sees interesting opportunities in Southeast Asia. "India is a clear example of reformist policies that the markets recognize positively, and Vietnam is an interesting investment case in the development of its domestic economy together with its export potential of leading and competitive products," he explains. As for Latin America, they like Mexico, "in the heat of US economic growth and expansion," and see less potential at the moment in China and Brazil, as they see valuations as priced in.

Mexico is interested, although there is no unanimity on the potential of Latin America

However, regarding the other large emerging region, Latin America, there is not the same consensus as regarding China and its surrounding countries. “The Asian region exhibits a better economic performance, but also trades at less attractive levels. South America is more affected by the pandemic, but the route can be much longer because the valuations are more attractive, ”argues Alejandro Varela, manager of the Renta 4 Latin America fund, who, however, recommends always investing in a diversified way. "There is a long year ahead and I am convinced that there is a lot of potential in the region, in this scenario of unbeatable financing conditions, a weak dollar and a relaunch of the global economy," he adds.

On the other hand, for Isabel Sánchez, portfolio manager of Arquia Gestión, Latin America is usually more vulnerable to the ups and downs of the world economy and its own economic, political and social challenges. “Countries with a lot of potential, but with many challenges. We prefer, when investing in Latin America, access through global funds, with not very high positions in the region”, she clarifies.

big bets

Cost effectiveness. They are doing well. The best funds that invest in stocks or bonds from these countries are offering returns that exceed 120% over five years and 60% over three years, in the case of variable income vehicles. If we go to fixed income, the returns are also attractive, but they barely exceed 33% over five years.

Actions. The trade war has occupied much of the headlines, so investors are overlooking "the significant progress that China has made in developing its capital markets, going from 500 to 1,600 the universe of shares," highlights the Columbia Threadneedle Emerging Team. In addition, China has allowed firms such as JP Morgan and Goldman Sachs, among others, to have subsidiaries there that will work to strengthen the quality and strength of the capital market in general.

Being selective, essential to win in fixed income

For the specialists consulted, currently the shares of emerging markets are more attractive than debt assets; however, those managers focused on fixed income are positive. Yes, being selective.

For Alejandro Arévalo, emerging market debt expert at Jupiter AM, it is still very important to take into account the great diversity within this asset class. “Differentiation is key if you want to outperform the market. We have some 80 countries in which we can invest, and not all of them are at the same moment in the cycle”, he acknowledges.

Two clear examples for him of the differences are now India and Turkey. The former is undergoing a rapid recovery, with "this year's prospects of an advance of 12% of GDP", while the latter has recently suffered strong volatility in the currency and in the fixed income market, after the dismissal of the governor of the country's central bank.

In a low interest rate environment, Luca Sibani, head of discretionary and absolute return investing at Epsilon, says local currency debt should perform better for multiple reasons. Firstly, because of its attractive valuation, since “if we exclude the temporary spikes in inflation due to energy prices, sovereign debt continues to offer a positive real interest rate. Second, given "the positioning, because the exposure of foreign investors to local debt has been steadily declining for several years." Finally, the opportunity for currency appreciation.

Claudia Calich, manager of the M&G (Lux) Emerging Markets Bond Fund, is prioritizing high-yield government and corporate debt from these countries, but “we are also bullish on local currency bonds and emerging market currencies. . In our view, valuations remain cheap, roughly 30% lower than before the taper tantrum [when the Fed announced a reduction in bond buying] in 2013, and even lower after its underperformance in the first quarter.”

At M&G they are finding good opportunities in Mexico, which, in her opinion, should benefit from strong growth in the United States. Also, rates remain attractive there as its central bank was less aggressive than others in cutting in 2020.

Thomas Rutz, manager of emerging market funds at MainFirst, also believes that the corporate high yield segment is attractively valued, "since it structurally benefits from the acceleration of the economy, the increase in commodity prices and some historically low rates. Also, he doesn't think rising rates are a major risk at this point, because "when combined with an accelerating economy, it's a positive for these asset classes."

“Thanks to its sheer size, over US$2 trillion, the emerging corporate bond universe offers investors fertile ground to search for yield. The key is to take an active approach”, says Nabil El-Asmar Delgado, head of Vontobel AM Iberia.