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Compelling investment opportunities in emerging markets still remain, says BNY Mellon

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Despite perceived political uncertainty and rising inflation, the valuation case for emerging markets is still compelling, according to BNY Mellon’s Emerging Markets Report.

In the report, fund managers from Newton, Standish Mellon Asset Management Company and Insight Investment look at the latest trends affecting emerging market assets and provide an outlook for the months ahead.
 
The report includes views on the growth of long/short strategies in emerging market fixed income, insight into the impact of political risk on the sector and the influence of China.
 
Sophia Whitbread, emerging market equity income manager at Newton, says: “Monetary conditions in the West look set to remain relatively loose for some time, as key developed markets continue their struggle with heavy debt burdens. Against this context, we continue to see emerging markets as relatively well-positioned globally, and find the current valuation of emerging markets compelling, both relative to other areas and on an absolute basis. We also believe that demand for equities for their income will continue to be supported by ageing demographics in developed markets as older people seek income for their retirement in a low-interest rate environment. Against an uncertain backdrop, with significant divergence in trajectories of countries in both developed and emerging markets, differentiation between markets and individual stocks will become increasingly important.”
 
Looking at where investors should consider for value in local currency emerging market bonds, Alex Kozhemiakin, head of emerging market debt at Standish, sees the most value in Latin American markets such as Brazil, Mexico and Colombia, as well as in South Africa.
 
“We view other local currency bond markets of the Europe, Middle East and Africa (EMEA) region as less fundamentally attractive and feel the Asian markets are expensive,” says Kozhemiakin. “In US dollar debt Standish favours some EMEA countries, including Kazakhstan where we see very good value in some quasi sovereigns backed up by high oil prices.”
 
Standish also favours Lithuania, citing its strong credit quality. Colombian external bonds are also favoured. Across US dollar denominated debt Kozhemiakin sees more value in quasi-sovereigns and corporates than in sovereigns, particularly for the larger, highly rated countries.
 
Regarding the emerging market corporate debt universe, Rodica Glavan, Insight Investment’s emerging market debt portfolio manager, sees pockets of value in places like China but cautions that investors have to be distinguishing in their choices. Glavan also sees some value in Indonesia but is less positive on South Korea and Taiwan.
 
Calling Eastern Europe interesting with fluctuating dynamics, Glavan says: “There is not an appealing level of diversification available in these markets just yet. Turkey and Russia may have more issuance than Hungary or Poland but of course, you have to be cognisant of what is happening in these countries at a political level. Latin American issuance has risen in places like Mexico and Brazil but also in Chile, Colombia and Peru. As a result of a lot of good quality in Mexico it has become somewhat expensive whereas Insight does see some value in Brazil, which had a difficult year in 2013.”

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