Speakers were Kim Catechis, Investment Strategist at Franklin Templeton, John Leiper, CIO at Titan Asset Management and Marcus Weyerer, Senior ETF EMEA Investment Strategist at Franklin Templeton.
The impacts of COVID-19 and Russia’s invasion of Ukraine, how to disaggregate emerging markets (EM) and changing single country exposures were the topics discussed during ETF feeds recent webinar in partnership with Franklin Templeton.
The webinar, titled Lessons from Russia: Weighing Risks and Opportunities in Emerging Marketsbegan by reviewing the turbulent macroeconomic environment and the effect this has had on the role of emerging markets.
Kim Catechis, investment strategist at Franklin Templeton, said investors had enjoyed a “bright 30-40 year period”, but warned that the Russian-Ukrainian war had “raised the decibel level in an already difficult” about inflation – and supply chains. especially.
“What worries me the most is food price inflation,” Catechis said. “Food prices are not responding to interest rates and central banks are ill-equipped to deal with food price inflation.”
Risks related to food security and inflation in the context of the Russian-Ukrainian conflict are particularly pronounced in ME. For example, just under 40% of India’s inflation baskets and nearly half of the Philippines’ inflation baskets are made up of food items.
Elsewhere, Brazil had a good start to the year but remains a large net importer of fertilizers, a supply chain that is heavily dependent on Russia given that it is the largest exporter of fertilizers at around half a billion dollars , according to the Observatory of Economic Complexity.
John Leiper, CIO at Titan Asset Management, argued that while the invasion of Ukraine is significant, it is only the latest episode in a series of tensions and aggressions between the West, Russia and China.
He added: “War could have far-reaching consequences and create a shift from global interconnectedness to a focus on security. From global capitalism to a less globalized, more fragmented world with a more structural recovery in inflation.
“This perspective really puts a magnifying glass on emerging markets. In an environment of increasing volatility, it will be increasingly important for investors to “look under the hood” to identify idiosyncratic risks. »
How to Disaggregate EM
Moving away from a broad exposure to emerging markets, Leiper noted the use of acronyms to group developing countries – such as “BRICS” and “CIVETS” – but cautioned that these often imply an “element of marketing and trying to wrap things up” and instead favors a more granular approach.
While noting that volatility is now much higher than it was during the pre-pandemic era, Leiper continued, “We could go through a longer period of volatility before a new paradigm takes hold. . Don’t be a hero, stick to the fundamentals if you choose to go more granular.
Catechis added that investors should do sufficient due diligence when considering exposure to a single country, including research on topics such as political politics, industry composition and even education level. of its workforce.
“Emerging markets have always been an asset class with polarized returns. Depending on your investment horizon, you should think about what you expect to come,” Catechis said.
“You have opportunities in emerging markets that are overvalued, then ones that are undervalued and then undervalued. The problem is, you have to do the work to figure out which ones.”
Agreeing, Marcus Weyerer, senior ETF EMEA investment strategist at Franklin Templeton, said investors should be aware of sector biases such as Brazil and its focus on commodities and Taiwan and South Korea with their specialization in commodities. technological components such as semiconductors.
Evolution of exposures to a single country
Overall, however, Weyerer argued that investors are increasingly looking to disaggregate their exposure to emerging markets as they become more comfortable with more concentrated plays.
“The benefits of disaggregation now outweigh the costs compared to 30 years ago when information, access and trading costs were a burden. These costs and product costs have come down.
Speaking on the direction of investor interest, Weyerer said demand for exposure to Brazil was strong as the country has largely benefited from Russia’s exclusion from international markets.
Meanwhile, he noted that interest in China was being discussed with customers, although most activity remains on the sell side for now. Although Chinese equity valuations are now at potentially attractive levels, Weyerer noted that “in times of short-term panic, fundamentals don’t matter to some degree.”
Concluding the conversation, Catéchis touched on what he saw as red herrings such as emerging market political risk.
For example, while much has been made of the Chinese Communist Party’s (CCP) intervention in his country’s tech sector and its impact on valuations, Catechis pointed out that most governments intervene in markets and were often wrong. In fact, at one point the UK changed the tax treatment of North Sea oil 19 times in just a few years.
Along the same lines, Leiper said emerging stocks are often seen as falling on ESG data due to a lack of formalized reporting. On this, he suggested that “the overriding factor in ESG is quality” – so those looking for an ESG overlay to their emerging market exposures might do worse than use quality as an indicator.