investment viewpoints

    Weathering cycles in Emerging Markets

    Weathering cycles in Emerging Markets
    Didier Rabattu - CIO, Sustainability Equities

    Didier Rabattu

    CIO, Sustainability Equities

    Emerging Markets (EM) now offer a more complete range of investment opportunities. 

    EM assets have evolved over the space of a few decades. From what was once a concentrated, narrow and volatile space, now represents an increasingly deep and diverse investment universe. This provides investors with an attractive playground for capturing a large range of growth opportunities.

    Currency is one EM aspect that many investors may have suffered with in the past. For example, equity or debt investments could increase in value, while the currency depreciates, eating away at returns in hard currency. It is therefore imperative to carefully dissociate between assets in stronger currencies, and to hedge exposure to weaker currencies. Our research shows that countries with strong fundamentals, and limited external dependencies, will typically boast a stronger currency.

     

    Currency comparison

    Didier-currency-table-01.png

    Source: LOIM calculations, Bloomberg Economics, World Bank.
    1Current account figures are 5-years average quarterly figures (% of GDP), 3CPI figures are 5-years monthly YoY figures until most recent data.
    2External debt and government effectiveness are 5-years average yearly figures as of end 2017.  Allocations are subject to change.
    For illustrative purposes only.
     
     

    FX move versus vulnerability 

    Didier-FX-Chart.png

    Source: LOIM calculations, Bloomberg Economics, World Bank. FX change measured from 31.12.2014 until 31.12.2018. The vulnerability rank scale is higher the more vulnerable or the lower the more reliable).

     

    Many investors have typically invested in EM in a momentum-driven way, with limited structure in their convictions. In our view, to enhance returns and mitigate risk, investors should allocate within each emerging country across equity, debt (hard currency and local currency), and commodity-linked assets with strong attention paid to currency exposure and country’s weight. Such a structured allocation can provide a solution with better risk-adjusted returns and less drawdowns. This structured allocation can in turn allow investors to build a structural allocation to EM assets and be less tactically driven.

    important information.

    This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393
    Lombard Odier Investment Managers (“LOIM”) is a trade name.
    This document is provided for informational purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipients exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. The contents of this document are intended for persons who are sophisticated investment professionals and who are either authorised or regulated to operate in the financial markets or persons who have been vetted by LOIM as having the expertise, experience and knowledge of the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person. This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
    Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
    Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
    Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
    No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a financial promotion and has been approved by Lombard Odier Asset Management (Europe) Limited which is authorised and regulated by the Financial Conduct Authority.
    ©2019 Lombard Odier IM. All rights reserved

    related insights.

    related content.