Simon Lue-Fong
Institutional investors remain optimistic about emerging markets despite continued volatility in this sector, according to new research from Vontobel Asset Management.
The research surveyed more than 300 institutional investors across North America, Europe, and Asia-Pacific.
According to the survey, 72 percent of institutional investors were optimistic about GDP growth, inflation, and bond yield premiums in European emerging markets prior to Russia’s invasion of Ukraine.
However, since the invasion, only 55 percent of responders were optimistic.
Despite decreased optimism around European emerging markets, globally, these markets as a whole are still appealing for institutions.
Additionally, the survey revealed 64 percent of investors plan to increase their asset allocations to emerging markets fixed income over the next two years.
The reasons cited for these allocations include: diversification benefit versus current holdings (56 percent); highly liquid market (48 percent); and favourable ESG prospects (47 percent).
Simon Lue-Fong, head of the fixed income boutique at Vontobel, said: “Despite market headwinds, global institutional investors recognize the need to diversify to provide both higher yields and insulation from market and geopolitical volatility in other asset classes.
“Emerging markets fixed income can meet those needs in investor portfolios but requires an experienced active manager to navigate the unique challenges associated.”
Institutional investors indicated the top challenges they faced when investing in emerging markets fixed income. These were: default rates and debt load (51 percent); liquidity (48 percent); volatility (45 percent); and concerns about corporate governance, data quality and transparency, and reporting standards (38 percent ).
Almost all - 91 percent - of investors reported using ESG investment strategies in their emerging markets fixed income allocation, including: impact investing (55 percent); systematic screening to include or exclude securities (54 percent); and engaging with issuer management to influence ESG policies and practices (49 percent).
However, investors also said there are several barriers preventing their institutions from making ESG-focused investments in emerging markets fixed income.
Among these were: data inconsistency by third-party providers (62 percent); scepticism about the positive impact of ESG investments (61 percent); the perceived higher risk associated with emerging markets fixed income (43 percent); and lack of suitable ESG offerings from exteral asset managers (43 percent).
Vontobel Asset Management is an active asset manager employing more than 450 professionals worldwide, including 200 investment specialists. It creates strategies and solutions covering equities, fixed income, multi-asset, and alternative investments.
