Vontobel finds emerging market attractive at current valuation

Vontobel Asset Mgmt - Executive Portraits, Rajiv Jain

Rajiv Jain, Chief Investment Officer at Vontobel Asset Management, New York

By Emily Lai

A manic quarter seen in the market for the past three months where turbulence found across markets and asset classes, with emerging markets(EM), hit harder than their developed market counterparts. The iShares MSCI Emerging Markets ETF dropped 27% from its year high in May and currencies in the emerging markets have also tumbled. Despite the manic, Rajiv Jain, Chief Investment Officer at Vontobel Asset Management, New York, believes the recent correction is overdone and still finds long-term opportunities in EM.

How it all started

The initial sell–off in EM started in May/June when the market was worried about the Fed rate hike, which could lead to the reduced money inflow to the EM securities market. Then, concerns over China’s economy took over as the main reason when GDP figures and capital outflows data were out. Together with the increased political instability, especially in countries like Brazil and Turkey, investors’ confidence was further reduced.

Why this is not the beginning of a major emerging market crisis

“EM crises tended to follow a fairly predictable pattern triggered by significant FX debt and a precipitous currency decline,” Jain says. “But this is not the situation today.”

The EM has built themselves a firewall by reducing the reliance on foreign currency debts. Currently, Ukraine is the country with the most US Dollar Debt, as high as almost 80% of their GDP, but except for the extreme case, most EM governments now issue local currency denominated debts. With the depreciation of the home currency, not only does the economic growth can be enhanced, but also can lessen the burden of the debts they hold.

Although corporates are not picking up with the speed of changing to local currency denominated debts, Jain still finds the total debt burden as manageable for most countries.

Another source of instability comes from the decline of currency. According to the International Monetary Fund, about half of the EM countries have now floated their currencies. Floating rates can help mitigate the economic impacts of higher US interest rates and enable the countries to depreciate their currencies, instead of importing the US monetary policy. Even for the countries still maintaining a currency peg, they mostly have significant FX reserves, shielding them from systematic crises.

Finding opportunities

Jain believes EM “have learned from past mistakes” and are more stable today. The uncertainty left behind would be the timing of asset price recovery as capital flows into EM have turned sharply negative in the past three months (with no aggregate outflows excluding China).

Jain highlighted Brazil as an investment opportunity ahead. “Despite the country’s current struggles, we do not believe that the situation is as dire as the headlines suggest and continue to find investment opportunities in high-quality Brazilian companies.” He believes the country is starting on structural reforms, and the country would emerge stronger and more prepared for the next cycle of economic growth. BM

Strategies Ahead
  • Trimming less defensive investments to adjust to the new reality (Q2 GDP contracted 2.6% year on year)
  • Recent Standard& Poor’s downgrading of Brazil sovereign credit to junk status is concerning but not necessarily an indicator of future market performance.
  • Opportunities in companies that will be resilient to the current macroeconomic challenges in the country, including card companies, fuel distributors and consumer staples sector