Roundtable

Global Emerging Markets 2022

Professional trustees, the head of public markets at a pension pool, an asset manager and consultants sat down to discuss how investors should approach global emerging markets.

February 2022

Sponsored by:

Emerging markets are the backbone of the global economy. Favourable demographics and an abundance of commodities mean they are driving most of the world’s economic growth.

However, cracks are appearing. Inflation is raging and there are problems in China. Then there are these markets carbon footprint, which is the world’s largest, and now the invasion of Ukraine.

Yet were investors too hasty when they dumped their emerging market assets earlier this year? We sat down with pension schemes, asset owners and consultants to find out.

The Panel

Alasdair Gill, head of investments, Scotland, XPS Pensions Group

Alasdair is a partner at XPS Investments, where he heads up the investments team in Scotland. XPS is a provider of investment consultancy services to pension schemes across the UK.

He currently advises many pension schemes across the UK, and have also previously advised many charities and university endowments, both in Scotland and around the UK, on all aspects of their invested assets, including objective and strategy setting, investment manager selection and monitoring.

Alan Pickering, president, BESTrustees

Alan is president of BESTrustees and a trustee of a number of pension schemes. These include The Plumbing Industry Pension Scheme which he chairs and the People’s Pension. Alan also chairs the governance group of the Royal Mail Statutory Pension Scheme. 

He is a past chairman of the National Association of Pension Funds (NAPF), now known as the Pensions and Lifetime Savings Association (PLSA) and the European Federation for Retirement Provision (EFRP).  

Amandeep Shihn, head of emerging markets equity & sustainable investment manager research, Willis Towers Watson

Amandeep leads on emerging markets equity and sustainable investment manager research within Willis Towers Watson’s manager research team. Particular areas of focus are researching global, emerging market and Asian equity strategies and sustainable investing.

Dinesh Visavadia, director, Independent Trustee Services

Dinesh provides trustee services to pension schemes and charirties. He has a strong track record in leading and delivering change, particularly in the areas of design and implementation of new and enhanced systems, management and integration of pension and benefit arrangements, risk management within pension plans, technical support for trustees and leadership on M&A pension issues.

Georg Inderst, independent adviser, Inderst Advisory

Georg is an independent adviser to pension funds, institutional investors and international organizations on infrastructure investment and finance for developed and emerging countries. His work is based on extensive experience in investment management, economic research, and pensions governance.

Kate Mead, CIPM associate investment director, Cambridge Associates

Kate is the lead for EMEA equity manager research efforts based in London, serving a range of clients globally. Primary research focus on covering listed equity markets in EMEA, but also hybrid equity strategies across public and private markets.

Rob Treich, head of Public Markets, London CIV

Rob is responsible for leading London CIV’s investments across public equity, fixed income and multi-asset funds, working with the CIO and colleagues on the Investment team to develop a strategy for public markets and a range of products that meet the needs of client funds

Ian Smith, portfolio manager, Newton Investment Management

Ian is a member of Newton’s equity opportunities team. He joined Newton in October 2020 to manage the global emerging markets portfolios. 

The debate

How are institutional investors accessing global emerging markets?

Rob Treich: We have an emerging market equity fund. We also provide access through our all-country equity mandates, where we expect managers to invest part of their capital in emerging markets. In addition, our global investment grade bond fund holds emerging market debt in hard and local currencies.

Dinesh Visavadia: It is a challenging time for trustees. There is a lot of uncertainty, but this is an asset class where there is growth and the opportunity to add value.

Visavadia: Now that the world is changing, there is an opportunity to look at the asset class differently. Rather than combining it into a global emerging market fund, could we start doing our own country-wide allocations? This is important because every economy is travelling in a different way. Sustainability is a big part of that and it challenges the old-fashioned market cap way of doing things.

Alan Pickering: Our time horizons in defined contribution (DC) land are much longer than in defined benefit (DB) land. In driving more than 40% of global growth, emerging markets have a part to play within default funds and probably do not need much realigning on the basis of pound cost averaging. But I am not keen on having too many dedicated funds in the self-selection part of DC schemes.

In DB land the time horizon is much shorter for most of my schemes, so one has to be careful not to tie up money in what could be a volatile or illiquid market. The exciting part of the job is DC land. The more freighting bit is DB land where we are on ever-shortening timeframes with consultants telling us we are closer to the endgame than we think. So, what are you going to do with your emerging market portfolio which is in a trough?

Alasdair Gill: That chimes with the conversations we are having with a lot of DB schemes. They are generally on journey plans to exit from growth assets, particularly equities. So, emerging markets can be one of the first to be ditched. On the DC side, we agree that equities are part of any long-term growth portfolio.

Is growth easing in China a concern?

Ian Smith: China is going through a tough patch. There were tighter monetary conditions in China coming out of Covid, after it had weathered the initial Covid period, arguably, better than other countries. That coincided with policies designed to address some of the imbalances in the economy, particularly in the real estate industry. All these things have brought to a head a slower growth period.

When you look at how policy is likely to evolve globally, China stands out as the one economy where easing will continue in the near-to-medium term. But there are question marks on the extent to which that will stimulate growth.

Could the real estate debt crisis impact other sectors in the country?

Smith: The debt problem is structural. Huge amounts of capital have flowed into China in the past 30 years, which has been intermediated through the banking system. A lot of this money was magnified and channelled into fixed assets. As a result, the real estate industry, which was less than 10% of the economy in 2000, is now 30% of the economy, which is too large.

There is no doubt we will see a rationalisation of that industry. The ambition of the Chinese authorities is to handle that in a stage-managed way rather than cause an abrupt shock, which would send shock waves across the global economy. A lot of economic actors have been preparing for such a peaking of property investment in China. We have already seen a rationalisation of many components of the supply chain feeding into China’s fixed asset investment cycle. We have seen consolidation in lots of industries. The iron ore industry is a good example. The question is whether this moderation of the excesses in China is achieved piecemeal or abruptly.

Georg Inderst: Technology is also suffering from political interventions. We might see more global repercussions in technology stocks than real estate. The big US technology companies, which are a good proportion of the S&P500, have suffered a setback due, in part, to inflation, interest rates and valuation concerns. But the Chinese authorities reining in such companies to stop their owners or managers from getting too powerful also has an effect.

Treich: This creates opportunities in other segments of the economy. China is massive and if you look beyond the main indices, into A Shares, for example, there are opportunities coming through in healthcare, industrial automation, consumer spending and environmental services which are exciting, but not as easy to access. On real estate, one of our multi-asset managers has seen a fallout linked to the crisis in China’s property sector, which means there is value in Asia’s debt markets, if you are good at credit selection. That is another offshoot opportunity in an environment where yields are challenging.

Pickering: One must not get too hung up about China and India, there are other parts of Asia and other parts of the world.

Kate Mead: A lot of our managers feel that the other emerging markets have been overshadowed by the meaningful allocation to China within benchmarks. We have clients enquiring about GEM ex China as well as China allocations to better manage that exposure rather than being constrained by an index that dedicates what weight they should have and where. There is an opportunity set outside of China that is valued by our clients and managers.

What countries and industries are they interested in?


Mead: There is a perception that India has been overshadowed by China. It did quite well last year, so that could reverse some of the flows and overweighting we have seen. Some of the more cyclical opportunities outside of China can potentially be found in Africa and the Middle East.

Amandeep Shihn: On the question of whether China should be separated from other emerging markets, it is seen by some as a market in between the broader emerging market universe and developed markets. China, like India and Brazil, is an emerging market using standard index-inclusion guidelines as a barometer, i.e., GDP per capita. This definition creates a debate on whether South Korea and Taiwan are emerging markets, while large index providers take different stances on South Korea. But emerging markets is an unfair definition for this group of countries. It assumes each country is moving to some shinier new place and that they are a collection of similar markets. Rather than developed, emerging and frontier, they are perhaps better defined on a global scale as lower growth rate or higher growth rate economies.

How are your clients accessing China?

Shihn: For the large part, the MSCI Emerging Markets index’s China exposure is driven by the offshore market, so investors are under-exposed to China’s onshore economy. We have allocated more to dedicated onshore China managers who sit alongside broader GEM managers in client portfolios, but we have not split China out of emerging markets because by definition it is an emerging market.

Inderst: Emerging markets is a wide and loose term. The wake-up moment was when China entered the indices in a bigger way. In the old days, you had to go indirectly through Hong Kong or Singapore or other countries. Suddenly, it comes to market with a 30% weighting in an emerging market index. In bonds it is worse. Then the question arises: do you want to invest in Chinese debt? And what are we really buying?

Gill: I am in favour of All World indices for equity benchmarks, particularly if there is an active component so managers can allocate with more discretion. It is also about exposure to the economy rather than exposure to where companies are listed. You can get good emerging market exposure through developed market companies. All World is ideal but there is an argument for having an ex-China index, particularly if trustees have concerns over governance in China.

Mead: A lot of emerging market managers are underweight China. It makes up 40% of the EM benchmark, but managers are often uncomfortable with having such a chunky allocation. Ex-China allows them to manage their exposures better. Concerns over ESG is another rational for some of our clients’ excluding China.

Smith: What is the homogeneity you are looking for when investing in an emerging markets index? One area of homogeneity currently is the influence of politics on companies in most emerging countries and the need to understand the ESG risks, particularly around governance. Other than that, there is not a huge amount of homogeneity. If you define emerging markets by the overall size of the economy, then you have question marks around China’s inclusion in the index. If it is more around income per capita and the pace of development, then China merits inclusion.

There are other considerations when reflecting on whether China should sit within emerging markets, such as the potential controversy of excluding China but keeping Taiwan, which is 16% of the Emerging Market index. Excluding China would see income per capita across the index rise significantly. There are big index weightings in Taiwan, Korea and the Middle East, so in excluding China you would move further away from what some people define as an emerging market being a low economic base.

Another important question is who is best placed to have discretion over key asset allocation questions. Currently you are giving emerging markets fund managers the discretion to allocate between China and ex-China. You also have to consider who is best placed to have discretion around which stocks to own in China; do you want a China-focused manager, who is based in the country, or a GEM-focused manager who may be more experienced in areas like governance? There are so many areas to debate, but it is valid to think about this topic, given where we are in China and what it means.

Visavadia: Whilst it is a convenient way of classifying risk into buckets, it has no value for investors, frankly. I do not hear a lot of conversation among trustees on the issues we have raised today. Everyone sees emerging markets as high risk, difficult to govern and difficult to transition. That is not necessarily true, because there are companies growing fast that we ignore because of this label we put on them. Education is needed for trustees to understand what these companies can contribute to portfolios.

What do you look for when handing discretion to an emerging markets manager, Dinesh?

Visavadia: I like to see a balance between onshore and offshore Chinese investments, which is not there. Things are opening up slowly, but I am not sure it will happen in half my lifetime. What is more important is that China’s system is different. They have different policy responses.

Making issuers in the real estate market personally liable for their decisions is dramatic and does not happen anywhere else. It is a matter of time until China changes its policy because domestic pressures are increasing quite significantly. If they do not change, there could be social unrest. The world has benefited from the goods and services China offers, which kept inflation down for years. Going forward that may not be the case. That will be a challenge in how we make decisions and is where the uncertainty comes in.

Inderst: Do you mean a change towards a consumption driven growth model? How could investors benefit from that?

Visavadia: It is all about demand for goods and services. There is an internal demand in China and, with the population being so large, they can easily satisfy it. Just like in the US. We can take advantage of that domestic demand. It is inevitable that when there is the likelihood of unrest in a country, the government keeps things calm at home. And China has a system of policy decisions that can address it quickly.

Inderst: The flipside of that is there has been a significant decline of foreign investment by China since 2017. The mindset of politicians and the media is still that China is going to buy everything, but the foreign direct investment figures show something different. That could be a reflection of the re-orientation of the growth model. Even in the belt and road initiative or their infrastructure projects in Africa, activity has not stopped but it is less than it was five or six years ago.

Smith: You have a situation where Chinese overseas investment is deficient relative to what it should be given the size of the economy. Then you have a dynamic around the money that has entered China and has multiplied. The concern is if too much of that capital leaves too quickly it would undermine the piecemeal approach to taking the excesses out of the real estate industry. That flight of capital out of China needs to be controlled, so what you are seeing is a reflection of that policy objective.

Pickering: In pensions, there are two end users: a trustee and, in DC land, the individual member. I do not think either a trustee or individual member should get close to these judgement calls. I am happy to determine the levels of risk and volatility when it comes to asset allocation, but as a trustee I am more comfortable with an All World equity or All World bond. I would rather delegate the fine-tuning of the asset allocation to an asset manager.

In DC land, we should keep temptation away from the scheme member to finetune narrow decisions based on what they have read in the financial pages on a Sunday morning. A pension scheme is there to make sure your finances do not peg out before you do. That is long-term decision making rather than playing the markets. As a trustee, it is my job to determine my risk appetite and where I want the fund to end up and delegate some of these challenging decisions to the asset manager or fiduciary manager.

Treich: Instead of talking about emerging markets and developed markets, perhaps we should think more about the diversification of the drivers of performance. Latin America, Eastern Europe and smaller segments of the Asian markets get less attention, but they are valuable for global exposure to equity or bond markets. That is challenging to convey to trustees and members. We do not control strategic allocations for the plans we work with, we provide the building blocks for them to make those decisions.

Smith: The energy sector is a small part of many indices now, and commodity exporting countries are a low proportion of the Emerging Market index. As investors might want exposure to those sectors and countries right now, given inflation and interest rate dynamics in the US, are your clients asking where their exposure is to these things that do not count in the index anymore?

Treich: Many of our clients have net-zero targets. Interestingly, we have seen the appetite of investment managers for exposure to oil majors be less aggressively negative than it was. The caveat is that they must be on the right path, there must be something visible to de-carbonise over time through setting meaningful targets. We are not seeing that in the big emerging market energy companies, but we would certainly favour engagement that could get the right commitment. I do not see why it would be an issue in terms of inclusion in our portfolios.

China’s income per capita was half of India’s 30 years ago but it is now six times greater. Can India emulate that in the years ahead?

Smith: China has achieved an extraordinary phenomenon. Imbalances have been created because of China’s growth model, but it has also helped the country achieve the largest eradication of poverty the world has ever seen. Now India can show that sort of lead, albeit not likely to the same extent. India has always had the right ingredients for growth: a low base, low credit penetration, supportive demographics and a competitive currency. Yet it has lacked the ability to attract foreign investment and trade flows. Five or six years ago, it launched a reform programme, which has been painful at times, but has seen India rise up the Ease of Doing Business league table.

When you combine that with the ingredients for growth, it is powerful. India now has tax schemes to incentivise companies to create manufacturing and production hubs. That has been a success. Even the World Bank has commented that this could push growth higher. Another point is the creation of infrastructure around mobile data. India has the cheapest mobile data anywhere on the planet at around 10 cents per gigabyte.

As a result, India’s per capita mobile data consumption is the highest in the world, which is staggering for an emerging market with a $2,000 income per capita. This opens doors to opportunities around making it easier to do business in India, easier to connect with your customers and easier to bring people into the formal financial system. India can use these ingredients to propel itself to the higher ends of the country league table around growth and durability.

The backdrop to that is we are going to see lots of people entering the middle class, as we have seen in China, and the products and services they will buy remain deeply under-penetrated, even on a GDP basis, and are sold within fragmented industries. The best companies will benefit from the rising middle class, rising penetration of those products and an ability to consolidate these nascent industries. That is a long-winded way of saying that income per capita in India will start to catch up with China. Even though we will not see the same sort of miracle that we have seen in China, India will still be an exciting place to invest.

Visavadia: The ingredients for growth in that economy are pretty good. Whether investors can access that is a different question. There are too many protectionist policies in India, so the domestic entrepreneurs will get a higher share of those revenues. The growth story is fantastic, but the opportunity to access that growth is limited. Service industries and data industries, which are not captured by the old-fashioned industrialists, might get better and get through under the radar. There are some young, savvy entrepreneurs coming through.

Smith: eCommerce is not a level playing field in India as domestic companies have a helping hand. As an emerging market investor, that can sometimes be nice because you have an additional moat around those businesses. That cannot last forever, though. If you want best-in-class companies they need to be exposed to the rigour of competition and these domestic companies have not been as exposed as they could have been.

Inderst: Another testing case are the privatisations of banks and infrastructure companies in India. International investors are willing and able to access it, but the jury is out because privatisations are rather politically driven.

Are standards of environmental practices and governance improving in emerging markets?

Shihn: Taking ESG metrics into consideration has risen up the agenda for almost every corporation across the world. This is evident through the growth of stewardship codes in different markets. Brazil and South Africa, for example, have stringent reporting requirements on governance and diversity.

There is often a difference between what ESG topic is seen as important to address within one market compared to another, but there is a growing appreciation that a more ESG-minded approach is better for everyone. So, it is being pushed up the agenda, but the availability of data and the quality of reporting in emerging markets is behind what we see in Europe and the US. Emerging market companies have global clients and supply chains, so they will start reporting more. There will likely be a share price tailwind which emerging market companies will benefit from as they start to report ESG data more regularly and reliably.

Smith: There are three ways to approach sustainable investing. First, invest in transitioning companies. The important thing here is not to open Pandora’s Box by investing in anything and saying it will transition. You should have confidence in the transition and the commitment of management to that plan. The second area is investing in balanced stakeholders, which are companies with high ESG standards. They are showing the way by setting targets around their carbon footprint, and around best-in-class disclosures and setting the agenda.

The third is solution providers, which are companies selling products and services that benefit society. It is in emerging markets where we see the best opportunity set for solution providers due to the extent of the underserved need.

For example, 60% of global emissions come from emerging market index countries, while almost 15% are from frontier markets. So, almost 75% of emissions are from these countries, yet they are well behind the curve in terms of energy transition investments, other than China, which is setting the pace. If you are looking for the highest growth in these solutions, it will be in emerging markets.

Whether you are talking about access to medicines or financial services, or the build-out of infrastructure, it is in emerging markets where we will see the highest levels of durable growth. In the best-in-class ESG companies we do not have the same opportunity set as we do in developed markets, but in the solution providers we have an unparalleled opportunity set. It is important to have diversification of exposure in any strategy, including a sustainable strategy, but our view is that you should have a disproportionate exposure to those solution providers, in my opinion.

Pickering: I like to avoid ESG colonialism, which is why the S and the G are more important than the E and I prefer engagement to exclusion. If we try to ensure that corporates across the world are well governed then they are likely to be environmentally and socially conscious. Something that worries me is that we have to take great care of the working people who are displaced as we go along our ESG journey. The level to which those people can be replaced once displaced is going to vary from country to country. We have to be careful not to bonfire these people in the interests of ESG colonialism and make sure they are repurposed at the same pace as we improve the E and the G.

Gill: A few years back sustainability was all about trying to find a low carbon version of what you were already invested in, which was seen as a quick win in looking more sustainable. Now we are more focused on the transition to a low carbon world. I have been involved in a number of endowments which were under pressure to be fossil fuel-free. One particular investment committee were vexed about this because they believed this was not the optimal route, as they believed in a more nuanced transition away from these companies, just “washing your hands” of fossil fuel companies.

Yet the university told them to do this, so they had to do it. We are all learning and the industry is moving on to understand that the transition is more important. We need to educate trustees to understand the best way to achieve this and that looking for “quick wins” is not always the best approach.

Mead: That is challenging for investors. The backward looking data, where available, is easily interpreted to justify the nuance of a forward-looking momentum of an ESG portfolio. It is a tricky conversation to say that if you do not want that exposure today, then you can have this great portfolio. Looking forward is a much more important journey, but it is hard to quantify and you need to have a conversation with clients to educate them about this.

Gill: I have had clients who understand that but want to go down a different route. Ultimately, trustees make their own decisions, but there can be difficult conversations about how to grapple with this. It is not easy.

Treich: The quality of engagement is improving. We are more flexible and less likely to impose a view which is not appropriate to the situation at hand. If you share best practice around governance or labour relations, the more forward looking companies in emerging economies are receptive to having that conversation and following through on it. Engagement is difficult to look at, but we provide specific examples each quarter on companies in specific countries, showing how the manager engaged and what the response was. That will get better, but it will take time.

Inderst: Do ESG indices help in emerging markets? We did some work with the World Bank on ESG ratings in fixed income. Everyone was enthusiastic that this could mobilise institutional capital into emerging markets, but it has almost had the reverse effect. Traditional static sovereign ESG rankings simply rank the most developed nations, such as the Nordics or Switzerland, highest. You need to have a dynamic approach that takes, actual and potential, improvements in governance, environmental, climate and social factors, such as human rights, into account.

Smith: The MSCI EM ESG Leaders index has outperformed the underlying index, which is not the case for developed markets. These ESG indices are broad and more directional. But you have to wonder if the scores are right; two providers can score the same company completely differently so there is often little correlation. There is a reliance on providing discretion to fund managers in terms of deciding where the company is going or affecting change through encouraging a transition.

For underlying clients, you are asking for something that is qualitative and that is a challenge for the industry. How do the base capital allocators get comfortable with providing that discretion to invest in the right way and promote change without having the backward data to corroborate it? It is the same debate and trade-offs when you ask the question of how important indices are. To some extent it is a question of a smart beta solution, supported by a lot of backward-looking, and at times questionable data, versus providing fundamental investors with discretion and watching them like a hawk, and asking them lots of questions around what they are doing. That is the basis of how we get comfortable.

Shihn: The correlation among rating providers is talked about a lot more than it is relevant. It does not really matter. If you look at the metrics the data providers use, they are relatively similar. What differs is the order they rank those metrics in and the weights they ascribe to them in their assessments. To say that ESG rating providers should come to the same conclusion on a company is like saying every value manager must value every company the same way and reach the same conclusion.

They can look at the same value metrics but come to a different conclusion because they have weighted similar metrics differently. That is the same with the data providers. What does not help is that they may use a AAA to CCC scoring system, which are similar to bond ratings, which tend to have a relatively high correlation. The fact that ESG ratings are different does not matter, in my opinion. You need to figure out what they are ranking within their company assessments. These ratings can be good data points for active fund managers to analyse a company.

Active stock pickers need to take qualitative views and understand the businesses they are investing in. Different data providers getting to different conclusions on the same company matters less than is discussed. What matters more when looking across the global universe of companies is that most of them take the same, internally consistent, approach to every country in the world. Regardless of jurisdiction, the qualitative approach they are taking is consistent from market to market. Emerging markets are not consistent in their capital and governance structures. There are also a lot more state-owned enterprises and more owner-operated companies than in the developed world. So, taking a single developed market-based view of the world and applying it to every emerging market is not going to give you the right result, which is why you need qualitative analysis to look at these data providers and their views on different securities. This is why active managers can be more value additive in emerging markets than perhaps in developed markets when using ESG metrics and scores.

Rob, would you go passive in these markets?

Treich: Preferably not. That is not to say that our partner funds would not have passive exposure to emerging markets. They might be interested in a net zero aligned variant of a passive index which is focused on emerging markets. We would not encourage it, but we could facilitate it. I prefer a fundamental active approach to make the best use of your discretionary capital. This is not only to generate returns but achieve other objectives, like investing responsibly.

Mead: The majority of our clients have an actively-managed portfolio with some passive around the edges. We are seeing an uptick of clients transferring their passive exposure to an ESG-aligned passive exposure or to mandates where they put their own criteria around what they can and cannot invest in.

Treich: We are marketing a Paris-aligned passive fund and every supplier has something along the same lines. Now there is a debate about whose metrics are best and are most relevant. This is difficult for clients to unpick that and get to grips with it.

Gill: We have spent a lot of time trying to work out the best way to go. We have many small clients where passive exposure in developed markets is the norm. Passive is not always ideal in emerging markets, but we are comfortable with its use for a small allocation. We have been looking at the best way to fold-in an ESG approach, which is a challenge in EM. Things are moving in the right direction with the index providers and we are looking at transition-focused indices rather than low carbon metrics.

Treich: We have a commitment to be net zero by 2040. Investing actively in emerging market equity and debt is not incompatible with that.

Visavadia: When it comes to ESG and sustainability we have an option to look at equity and debt. We have more control over the debt, because if you do not like the debt of a company you can walk away. Where the challenge comes in is in emerging market debt, which is made up of corporates and sovereigns. The corporates may be motivated to do good, but the sovereigns may have a different journey plan. They may want the capital to build a steel plant, which will revive the community, but will be powered by fossil fuels.

By investing in these products, we need to drill down and look at what we are getting into. It may not be ideal in the first five years, but the societal impact could be better in 10 years’ time. So, should we vote for that? The decision-making framework is not there. It will get more difficult as we go through the process because there are 17 Sustainable Development Goals. We need a framework above that to help us make decisions. These are challenging times. If the economy moves in one direction then passive investing is fine, but for the next five years there is a lot of uncertainty.

Pickering: The response to the first challenge is to line up with like-minded partners. Even if you do that, you cannot guarantee that the line-up will be maintained until the debt matures.

Visavadia: We have to go beyond the surface level proposition, look deeper into their philosophies and be involved in the managers’ decision making.

Shihn: We tend to see trustee boards place a different emphasis on emerging markets, treating them as a risky asset within a growth bucket, compared to developed market equities which are seen as growth assets within that same bucket.

Trustees seem happier to allocate to four to six global equity managers and perhaps one or two emerging market managers. In general, they want those emerging market managers to be benchmark-aware to avoid excessive volatility risk. That mindset needs to be flipped in that they should think about allocating to five or six emerging market managers with different benchmark agnostic investment approaches, but that requires time and governance budget.

This is where you are going to get better bang for your buck in terms of a diverse set of asset managers operating actively as a collective to build emerging markets exposure, taking emerging markets away from being seen as just a risky element within equity allocations and more of a growth and return driver. This can allow allocations to more country or regional specialists and build out exposure to emerging markets beyond just the largest countries in the index.

Visavadia: Improving the reporting from the advisory world could help significantly. We do not know if we performed well or not by having three good bets and three bad. But a report saying that this is the direction of travel, this is the trend in this organisation and this is why we are investing here would be powerful for pension scheme investors.

Smith: I can see the point that a great growth manager is a great growth manager, and a great value manager is a great value manager, so why push them to be too core? Why not blend that through diversification? The parallels of diversification are also relevant in my arena, for example, when investing in green technology companies. The long-term growth opportunity here is attractive, however, there are many unknowns, including around which green technologies will prevail. Different parts of the supply chain will be subject to different forces and differing raw material prices. Hence, we like to own a variety of leading companies across supply chains. Emerging markets is an area of high growth potential and high uncertainty, so it lends itself better to diversification to capture the opportunity.

What are you expecting to see in these markets over the next five years?

Smith: What will determine outcomes in emerging markets in the near to medium term is whether people will be less concerned about the things they are concerned about today. One of those is tensions between the US and China as well as the state of China’s economy. Another concern would be Covid.

Emerging markets will have less flexibility to provide monetary and fiscal stimulus in response to future waves of Covid. But looking at vaccination rates and how, for example, India faired during the second phase, and what these new variants might mean, there might be scope for us to be less worried about Covid.

Another current concern is around the outlook for inflation and interest rates in the US, and the trajectory of the dollar. However, we do not believe it inevitable that the dollar will keep rising. If you considered the US an emerging market, there would be some fairly clear amber warning signs for the currency. But the dollar, of course, has a special status.

It should be noted that we are not in a period of huge relative excesses in emerging markets, when you look at current accounts, real interest rates and credit cycles, and so emerging markets are relatively prepared for what is to come. Looking longer term, emerging and frontier markets are the only places where you can find that low-base domestic demand opportunity. India is the poster child of that, but there are many other economies where you can get that. In North Asia, you can find globally leading companies, as well as opportunities around the way in which China’s economy is changing. A lot of the industries we have talked about will be beneficiaries of that change. If you get exposure to these things, they will treat you well in your exposures to emerging markets over the longer term.

Pickering: In the wake of the pandemic, perhaps we will move from vaccine-delivered medicines to tablet-driven medicine. If we can get that delivery mechanism through emerging markets that could have a positive aid on economic stimulation. It is the delivery of vaccines that is the challenge in many of these countries rather than the vaccine itself.

Inderst: Emerging markets have always been volatile and will continue to be so. They have come through various cycles since the 1990s and allocations have slowly increased. Initially, it was listed equities, utilities, banks and telecoms. Then it was sovereign debt, corporate bonds, and now private equity is going into emerging markets as larger investors feel more comfortable being invested there long term. The story is still the same with today’s emerging and frontier markets. You are going for higher growth, diversification and a larger investment universe. We could talk about emerging market risks for another two hours but this should also be seen in context.

The main risk of running a global portfolio is the US being more than 60% of the All World equity index and driven by five or six big tech companies. That is by far a bigger portfolio risk than anything we have discussed today. While emerging markets have had a bad couple of years, and significant risks remain, you could make a decent case for rebalancing that direction going forward.

Treich: I am positive on emerging market equity and debt, but I worry that some of the episodes we had towards the end of 2021 and into January could be repeated in the sense that we have surges of volatility around interest rate and inflation expectations. That is not a great environment for assets perceived to be high risk. Hopefully, with more acceptance of the path interest rates and inflation are taking, things should calm down and the fundamentals will come through.

Gill: Emerging markets look pretty well valued. We have the best differential between them and developed markets for eight years. From that perspective, clients should have at least a market weighting to emerging markets. Developed markets are set for tighter monetary conditions, so I am positive at the current time on emerging markets.

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