In this panel debate, portfolio managers from both fields argue the case for their asset class.
Dylan Emery, Expert Investor Europe: What are the most interesting areas of the market for investors to look at?
Esther Chan, Aberdeen Asset Management: I’m biased, given that my job is to invest in emerging market corporate bonds. Let me tell you a story. YPF, an Argentinian oil and gas company, was recently nationalised by the government. The shares dropped more than 75%. What happened to bond holders? Bond holders got all their money back plus $1, because there were covenants protecting them. The point is that, yes, we love emerging markets, but there are some areas where we believe that corporate bonds are a better place to invest, compared to some parts of the asset class – not specifically equities, even though I did mention it this time.
Portfolio manager, Aberdeen Asset Management
Fund manager, Nordea
Chief investment officer, Japan equities, Eastspring Investments
Head of research and fund manager, Neptune Investment Management
Head of global emerging markets, Mirabaud Asset Management
Portfolio manager, Reyl Samena Credit Opportunities Fund, Samena Capital
Chris Taylor, Neptune Investment Management: As far as we’re concerned, the global bull market in equities that began last year will continue for another five or six years. It’s underpinned by economic growth across the world. You’ll see the largest increment we’ve ever had, going forward. It’s also amazingly well-spread; we’re not dependent on the US, we’re not dependent on China. In fact, the non- BRIC emerging markets will throw out as much incremental growth as China will. Now what that means is, it’s the revenge of the OECD-based global multinationals, because they can access that growth which a lot of other companies can’t. The other thing is, I wouldn’t worry about developed country bond markets. Because if you look at the BIS ratio-driven demand for AA and AAA bonds, that is in excess of the OECD’s ability to issue bonds, backed up by their central bank quantitative easing programmes. When you look at the markets, they’re fairly evenly balanced.
Ed Cowart, Nordea: I would disagree slightly with what Chris said, in that – at least in respect of the US market – the bull market has been ongoing for four years now. Remember that in March 2009, the concern in developed markets was that the banking system was going to melt down, profit margins were going to collapse, housing was looking over the edge of a cliff with no bottom in sight. A lot of things have happened in the past four years, not least the S&P 500 has gone from 600 to 1,500. Corporate profits have been amazingly resilient; I think that explains part of the move from 600 to, say, 800. Second, the banking system didn’t melt down. That may give you another 200 or 300 points, just thinking conceptually about the market on the S&P. Housing in the US is recovering nicely, and that’s very important for the economy, for collateral, for the wealth effect on US consumers. Finally, we have what I think is a big game-changer in the US, that nobody was even thinking about even three years ago. And that is the ability to exploit the vast shale resource with respect to energy. So there’s a lot of interesting things going on, and this has been the most unloved, unappreciated bull market I’ve ever seen.
DE: Kevin, you specialise in Japan. Give us your perspective on that area of the world.
Kevin Gibson, Eastspring Investments: I extolled the virtues of investing in Japan last year and the push-back was pretty hard, and it was around what I call ‘the five myths’: deflation, the debt position, demographics, the strong yen, and lower, falling trend economic growth. Our argument was those concerns were overstated and were discounted in current share prices. At the same time, we were saying that what investors were missing was quite a considerable change in corporates – incredible improvements in balance sheet health – and secondly around how aggressively they’ve been cutting costs. Those factors have been ignored by the market because, on a falling revenue basis, those virtues were never seen. Now, the pushback is even greater, because people are scratching their heads and trying to understand what has happened over the last year. Certainly the story around the corporate level is still as compelling as ever, and we’re at the start of that. The second point is that, for the first time, we’re going to have co-ordinated policy around the fiscal side and on the monetary side. That’ll be an extremely powerful driver of the economy and therefore profits.
DE: Richard, how useful is the distinction between emerging and developed?
Richard Yang, Samena Capital: Having spent my entire career in Asia and in emerging markets, I really dislike the terms ‘emerging markets’ or ‘developing markets’. For me, it’s like saying ‘hedge funds’; it doesn’t capture the diversity, the nuances, or the opportunity involved. What’s positive for Latin America may not be totally negative for China and, within the region, what’s positive for Indonesia may not be good for India. One thing that struck me in the past couple of years, was how what used to be emerging markets – where correlation could be one among different countries and asset classes, were very susceptible to capital flows – is now behaving a lot more like the developed markets, where there’s much more diversity in terms of opportunity. So where there’s a bubble here, could mean opportunities elsewhere. It’s very risky to categorise emerging markets as a whole; people have to take a deeper look into the opportunities, in terms of particular countries, regions or asset classes.
Dan Tubbs, Mirabaud Asset Management: I’m very bullish on emerging markets for all the reasons we know about; growth and better demographics in emerging markets versus developed, and the fact that emerging markets have low debt levels at government level, lower fiscal deficits. But the key point is that emerging markets, the stock markets, are still very inefficient compared with the developed world. So there’s a place for active fund managers in emerging markets, whereas in the developed world I would argue stock markets are more efficient, it’s much harder for active fund managers to outperform, and therefore why bother investing with active fund managers in developed markets? Just buy an ETF. In emerging markets, you’re better off with active fund managers.
DE: Esther, are international fund flows a big risk for emerging market corporate debt, and how should we manage that risk?
EChan: Before 2010, there really weren’t any funds in emerging market corporate bonds. All the fund flows in emerging markets over the last decade have been into government bonds. So I’m actually quite unworried about fund flows.
RY: Certainly we’ve had massive inflows into Asian and emerging market debt in the last several years. I feel that a lot of these fund flows are structural. The investors we talk to, whether it’s pension funds or insurance, are still massively underweight Asian debt in general. [Emerging market] equities are maybe a more developed product for them, but we think that the flows we’re seeing are not opportunistic – they basically have to diversify. The problems that are happening in Europe and the US are just a catalyst for them to wake up and say: ‘I’ve been ignoring these markets for a long time and have to be invested in them – if anything, just for diversification’. It’s interesting to also note that a lot of the fund flows that are not captured in the data are from within the region. I was asked yesterday: does Asia lack institutions like insurance company pension funds? Certainly it’s a very developing part of our capital system. But if you look at the whole region, most of the businesses are controlled by family groups and governments. So there’s a massive amount of capital that’s not being intermediated by traditional sources. I was doing debt in the ’90s, and when we issued bonds, I’d bring the issuer – it was New York, Boston, Milwaukee, San Francisco or Chicago. Half the job was being a travel agent. Now high yield issuers are doing roadshows in Hong Kong and Singapore – they’re not even going to the US. You have deals that are 90% distributed within the region. If you talk to any syndicate manager they say: ‘My number-one client is maybe Pimco, but my number two client is the big private banks in the region.’ Asian investors that traditionally invested outside the region are coming back and buying assets in Asia. So the market has added a lot of depth. I feel that certainly the flows are more structural, rather than opportunistic and fickle.
DE: How does shale gas change the US’s relationship with the rest of the world?
CT: It gives certain US industries a massive competitive edge. In particular petrochem, plastics, fertilisers – they’re building multi-billion dollar plants in the US for the first time in 30 or 40 years, as opposed to just tinkering with an existing plant. And it’s not just US companies like Dow, it’s companies like Shell. This is a massive structural advantage – paying $4 [per million British thermal units] as opposed to $8 in Europe, or the Japanese paying $16. The thing is, they’re about five years ahead of anybody else. It’s why the US recovery has been so strong; it’s not because of the politicians, it’s despite them. This is a ground-up, state-by-state boom in municipal revenues, state revenues and employment. It will roll-out through a lot of other countries. Poland is going for it – they don’t want to be dependent on Russia or Ukraine for gas. China’s got the reserves – they’ll push. The interesting thing is, historically, if you take the unit price of gas and multiply it by eight, you get the per-barrel oil price. So if you look at it from the point of view of what energy costs, then you switch to gas. The oil price at $117 is nuts – it should be in the mid-30s.