EM Investment opportunities – not only a crude oil story..

There has been much debate over the past months about crude oil prices impacts over emerging markets (EM). When some definitely benefit from the drop in prices, others pay the price of investor’s somehow over-reaction. Emerging markets are very similar and different at the same time but investors tend to put them all in the same bucket, downgrading them all at the same time in case of any major negative backdrop.

Standard Life recently published an interview of several asset managers questioning them about crude oil prices impact among emerging markets. Although answers seem pretty straightforward and obvious, I recall here some of the main statements as investors usually tend to consider emerging markets and more particularly emerging continents as a “whole piece” rather than a more eclectic one.

As fairly acknowledged by Andrew Summers (Investec Wealth and Investment), lower crude prices are globally positive:

  • It improves consumers purchasing power;
  • It induces commodity export countries to restructure and better diversify their economy preparing ground for the next growth story.

Some are definitely current red flags

While commodity exporters are undoubtedly suffering from the lower crude prices environment, not all are to be placed on the same footing. Below are some of the most widely cited as most exposed countries. But again, contexts are different when one get into details and long-term prospects are not comparable.

  • Venezuela is undoubtedly the most exposed and endangered nation for not having been able to retain enough savings from the commmodities buyoancy years. With crude representing 95% of exports earnings, the nation’s fiscal situation is in an alarming stage, gradually driving the economy towards an inevitable collapse – A total “no-go” for investors.
  • In the same vein, Russia is in a critical position, hited by western economic sanctions and dangerously exposed to the low crude prices environment (68% crude’s export revenues). Although some remain opportunistic on specific stock picking strategies, the current situation is definitely not clear enough and unstable.
  • As a next exporter and low diversified country, Nigeria is similarly exposed (95% exports earnings) and pay now the bill of careless and over-dependance years. However, unlike Venezuela, Nigeria’s newly elected president (Buhari) brought about a wave of high expectations. While investors have temporarily stepped back, most remain in the starting blocks  as Nigeria remains anyway  one of the largest and promising growth story in Africa.
  • Less dependant on crude exports, Brazil’s current difficulties are mostly derived from fiscal imbalances, over-dependance on raw materials exports and careless management of public spending. The Petrobras corruption scandal definitely worsened Brazil’s creditworthiness resulting in massive investors outlfows. The country is now in a process of huge “spring cleaning” leaving Dilma Rousseff sole in charge of restoring investor’s confidence and laying the foundations of a new growth chapter. Notwithstanding the latter, Brazil remains anyway one of the largest economies in the world (7th largest GDP) and foreign investments haven’t stoped  flowing to the country. In fact, Temasek and GIC, the two largest Singapore Sovereign Wealth funds have been increasing their share of investments in Latin America, opening offices in Brazil and investing in large educational and infrastructure projects.  China is not on rest, having made sizeable commitments to the Latin American region (USD250bn expected over the next years).

 While others remain little gems …

Be it oil producer or not, some emerging countries were already unattractive for many reasons well before the oil crisis (Venezuela, Russia, etc.).But as fairly mentioned by the EM asset managers interviews by Standard Life, investing in those new growth stories goes well beyond crude oil prices and relates more to growth prospects, middle-class rise, industrial development, etc.

As a matter of fact, all oil producers cannot be placed in the same bucket.

Alex Wolf from Standard Life Investment finishes mentioning Mexico which engaged a few years ago in a processs of diversification away from oil production. As fairly mentioned, the Mexican economy is already one of the most diversified from Latin America and boasts from a very interesting integration with the US. Although timing is not entirely there, Mexico is definitely in a good pole position and should gradually get increased interest from international investors.

Fund managers: What makes you unique?

As the markets keep extremely volatile, fund managers are working very hard to deliver attractive investment pitch to get a foot into the Asian market.

However, as most may have already experienced, penetrating the asian market can take time: working your branding and providing for short-term attractive return are the minimum basics but having this “something different” is what bank’s distribution teams in Asia are looking for.

A recent interview of Paul Stefansson, head of Asia Pacific UBS Wealth Management in the Asian Investor magazine gives an insight at what are the bank’s key selection criterias:

  • Min track record of 3 years – Although the UBS interview mentions a minimum 3 years track record, its is a very minimum one and acceptable if the fund combines altogether exceptional return over the last 3 years and a serie of attractive features (size, liquidity). A min 5 years track record sounds more realistic especially for fund managers new to the market.
  • Concentration and liquidity risk: this is even more critical in Asia as local investors tend to invest on short-term horizon and therefore need to guarantee an exit door. Minimum size is usually USD 100M AUM but USD50-70M could be considered if liquidity and stability of the core investment is guaranteed (own Fund manager’s investments for example).
  • What are investors demanding now: yield..yield…Yield. This is even more true in Asia and in a current context of zero if not negative yielding. Banks focus on equities, hedge funds but also more and more on alternative strategies which can potentially provide higher returns thanks to the illiquidity premium. Albeit gaining ground, alternatives strategies are still a “micro niche” in Asia though. This is due to the longer-term commitment that such funds involve, creating therefore a discrepancy with investors short-term preference. However, the low yielding context is undoubtedly creating a change in investor’s mindset and the market should gradually gain more sophistication.
  • Branding: Heads of distribution receive so many sollicitations that any “added feature” will make a fund manager shine among the crowd. Besides being in the top performance range, a fund manager has to get something “different” : niche market strategy, specific expertise / unique process. All Fund Managers can pretend to be the best in their categories but with many pretending it, let’s rather focus on your “inner difference or special story”.

 

 

Digitalisation : a must-have for the asset management industry

With the investment industry getting more and more global, one question remains: has the asset management industry really aligned with future investor’s needs?

On one side, most institutions developed to a global scale, providing investors with additional diversity and ease of investments access. On the other side, one must acknowledge that the same institutions remained relatively resistant or better said blind to a more subtile change ramping up in the industry : services digitalization.

Talking the same language than your investors..

With emerging markets (EM) aimed at representing the largest pools of wealth within the next decade, it is important if not vital to align as soon as possible with this new investor’s generation. Social medias and smart-phones online spending apps have experienced an incredible market penetration in EM and are expected to keep growing steadily. As a matter of fact, it is fundamental for the asset management industry to keep on track with this digitalisation trend and provide investors with attractive features.

Asnwering your investor’s needs..

As a “tech generation”, the new investor’s “breed” doesn’t attach much importance to loyalty: looking for performance and cost efficiency at the same time, value is given to innovation and instant access to portfolio and market’s information.

While at the same time dealing with increased compliance requirements..

Keeping up with tech development has never been so complicated for the industry as regulatory obligations have been constantly growing up over the last years. Increasing restrictions such as Know your Customer (KYC) or anti-money-laundering (AML) seem extremely conflicting with “online instant access features”.

Growing competition from micro-investment apps is putting pressure on the industry..

Answering to the needs of young investors who are facing increased investment constraints (minimum account balances restrictions, high comission fees), various software companies have been developing “micro-investment apps” allowing users to access to investment portfolios right from their credit or debit card. Among them, Acorns launched in 2014 already met a tremendous success: with a platform gathering already 650,000 users, the app recently raised a USD23M financing.

All in all, while the industry is concentrating efforts on global diversification and access to emerging markets, it is equally important to invest in digital offering : partnerships and/ or acquisitions between fund houses and fintech companies might actually become the new industry trend over the next decade.