Finding decent returns in the current environment is proving to be difficult for the majority of investors. Valuations in North American equities are increasingly prohibitive and traditional fixed income options are also struggling to deliver anything meaningful. With GDP growth rates improving moderately well, the emerging market space is becoming an obvious choice for Canadian investors, but even in EM options are limited and investors need to be guided towards the right strategy and investments if they are to achieve sustainable success.
For Sergei Strigo of Amundi Asset Management, emerging market debt, in particular, is a sensible and beneficial option at the moment. When looking for opportunities in the emerging market debt space, Strigo adopts a top down value approach in an attempt to identify mispriced opportunities in the market. “We look for any divergence between our assessment of where a particular country or corporate bond should be trading and where it currently is trading,” he says. “It’s a combination of a top-down and bottom-up approach because there is a lot of differentiation between different countries and corporate names.”
Strigo believes the differentiation currently being seen reflects the wider evolution that’s occurring in the emerging markets space. The divergence in the performance of countries and asset classes in EM at the moment is forcing investors to look more closely for opportunities.
“If you look at 15 years ago, all asset classes in emerging markets were up and performing in the same way,” Strigo says. “From 2014, there was a big shift when local currency started to depreciate and the hard currency space kept performing well. In this environment, investors need to be more picky when choosing what type of assets they want to be buying and what types of countries they be invested in. As a result, it is much more important to be in an actively managed fund as opposed to a passive-type fund.”
In order to find those elusive market returns, Strigo urges Canadian investors to embrace opportunities outside of their traditional asset allocation comfort zone. It is, he says, the only way to achieve greater returns in this environment of low global rates. “We see a lot of caution from Canadian investors partly because they used to achieve high yields relative to other developed countries, but that is not the case now,” Strigo says. “Don’t be afraid to get into something a little unusual. Investors do not have enough allocation to emerging market bonds and there is great potential for increasing allocations for Canadian investors.”
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