Despite the subdued investment sentiment globally, investors remain keen on emerging markets as shown by the resilient flow of capital into emerging market funds.
That is the view at least of Luke Browne, head of asset allocation for Asia in the multi-asset solutions team at Manulife Investment Management, who believes both equities and fixed income in emerging markets will outperform their developed market peers.
Talking to FSA, Browne said that investors should shift to a more Asia-centric portfolio as opposed to developed markets and the US due to rising interest rates.
“These companies have debt that had previously been issued at very low rates. Once that comes to roll over and renew, they’re going to be at triple the rates that they were previously. Now, that could lead to distress at the corporate balance sheet level,” said Browne.
“I think that we want to steer clear or be very thoughtful in any exposure we have in interest rate sensitive stocks and sectors, including growth and tech names.”
Another reason for Browne favouring emerging markets equity is because he anticipates the US dollar will weaken.
“The weakening of the US dollar played out a little bit earlier than I had anticipated and it moved very fast. I expect to see the US dollar to be going on this oscillating journey, which is going to have peaks and troughs, but I still think the destination will be a lower US dollar over the medium term.”
“That obviously impacts the attractiveness of commodity and US dollar sensitive economies, which you could broadly categorise as emerging market.”
Similarly, in fixed income, Browne also prefers Asian credits over those from the UK and the US.
Many investors have shied away from the Chinese property market after property developers defaulted in 2021 and early 2022.
The Chinese government imposed strict debt and cashflow targets, commonly known as the “three red lines”, which led to a liquidity crunch for many of the property builders.
“Clearly last year was particularly challenging for a lot of those credits. We see a lot of our competitors shutting down their exposures and selling assets at very distressed levels,” said Browne.
“We got a lot of comfort on the approach our analysts are taking and they actually started taking more exposures of these falling angels and holding onto the position that they had because they thought the market has overreacted and some of thee credits that have strong fundamentals were only dragged down,” said Browne.
He added that by holding onto some of the Chinese property names, that has been one of their best positions over the past six months or so.