Emerging Markets

INTERVIEW: Fund Manager Says High-Quality Emerging Markets Are Unfairly Cheap

Robbie Lawther Reporter 17 May 2017


Some of the stronger emerging markets are priced more cheaply than with developed economies that have a number of problems, suggesting there is considerable value to be found, an investment manager argues.

EI Sturdza Investment Funds portfolio manager Eric Vanraes reckons that high-quality emerging markets are now rated as safe as many developed markets, while not always getting the love they deserve.
Geneva-based Vanraes, who has 27 years of experience in the fund management industry and manages three fixed income funds, Strategic Euro Bond Fund, Strategic Global Bond Fund and Strategic Quality Emerging Bond Fund, thinks that emerging market bonds now offer the best risk-reward profile in the bond market. The MSCI Emerging Markets Index of equities, for example, is priced at forecast earnings at 12.61 times earnings, while the MSCI World Index of developed countries' equities has a P/E of 16.61 times earnings (in dollars; data as at April this year).

Vanraes has been at the firm since 2008, taking the role of head of fixed income investment. Joining the firm in such a year – the period of the worst financial crisis arguably since the 1930s – has been instructive. 

Before joining El Sturdza, Vanraes was head of investment grade credit at Union Bancaire Privée, the Geneva-headquartered private bank, from 2000-2008. During this time, he managed global investment grade funds, investing in markets which are assessed using proprietary risk management tools.
“High-quality emerging markets are largely unknown, but offer significant opportunities to increase yield without taking on greater credit risk.  I would like to help people understand that it is not as dangerous as global emerging markets. We believe emerging market quality bonds offer the best risk-reward profile and as such we continue to monitor these regions closely to spot opportunities,” he told this news service in a recent interview.

“Chile is AA rated; it is more or less the same rating as France. Peru has been invigorated to single A, and is less dangerous than Italy and Spain. There are so many examples where countries are improving dramatically,” he continued.
In the search for yield, flows into emerging market bond funds have picked up recently, driven by a period of calm across global markets with the VIX “fear gauge” index dropping to its lowest level since December, 1993, in response to Macron’s recent election victory in France. (The VIX index captures volatility based on pricing of options linked to the US equities market; the higher the index, the more risky markets are seen, and vice versa.)
Net inflows into emerging markeet bond and equity funds this year have surged to nearly $60 billion - outperforming gains made in the whole of 2016. 
This growth reflects a positive macro-economic outlook. International Monetary Fund (IMF) data indicates emerging markets are poised for 4.8 per cent growth in 2017 and 2018 respectively. 

”We invest in these markets because they are not high-profile. Today probably the most exciting country is Mexico. The [yield] spread has widened dramatically since Mr Trump’s election as President of the US, so we have increased our allocation towards Mexico,” Vanraes said.

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