Investors shun risk to increase EM holdings

North American investors want to diversify their portfolios through equity and fixed income allocations

Investors shun risk to increase EM holdings

The uncertainty of the pandemic dominates concerns of global investors but they are willing to take the risk of greater exposure to emerging markets (EMs).

Two thirds of institutional investors and discretionary wealth managers say that increasing their equities allocations to EMs over the next five years. Although only a minority are considering doing so in the next 12 months.

The poll of more than 300 wealth professionals across 18 countries by Vontobel Asset Management found that despite market volatility and a reduced risk appetite, investors recognize emerging markets as an asset class to enhance their investment returns and diversify their portfolios.

North American respondents were more optimistic about the outlook for EMs than their peers in Europe or Asia Pacific.

The driving force behind the focus on EMs is finding new sources for returns amid low interest rates. In North America, 40% of respondents believe EMs have potential for enhanced returns and more than one third believe that it’s easier to secure alpha in these markets.

The larger markets in Asia are the main focus (70% of respondents) while 60% favour emerging European markets and 40% Latin America.

Consistent shift
Matthew Benkendorf, Chief Investment Officer at Vontobel’s Quality Growth Boutique, predicts a consistent shift over time.

“The big tectonic changes are actually quite rare,” he said. “The point with emerging markets is to look for the steady improvement. If you don’t, you’ll miss the opportunity.”

But the shift to increased EM allocations is not without barriers, not least COVID-19 which is cited as the top risk by respondents. Trade tension and economic nationalism are also seen as high risk.

ESG factors are seen as an important part of navigating the risk, along with an active management approach.

Fifty-nine percent of respondents in North America say ESG factors influence to a great extent the decisions they make about their emerging market exposure.

“Powered by structural drivers such as demographic factors, emerging markets can offer more growth than developed markets in the years ahead. For investors able to balance risk with opportunity, the future is exciting,” commented Thomas Wittwer, Chief Executive Officer of Vontobel Asset Management, Inc., U.S. “Strategic asset allocation across a range of emerging markets should offer access to new opportunities and enhanced returns.”