Institutional investors see opportunities in emerging markets fixed income despite turbulent markets
The war in Ukraine has added continued volatility to emerging markets fixed income assets. According to a study published by Vontobel Asset Management, institutional investors around the world are wary of the war’s market and economic impacts but remain optimistic for the months ahead.
Vontobel surveyed more than 300 institutional investors and discretionary wealth managers in North America, Europe and Asia-Pacific during the first quarter of 2022. According to the survey, 72% of institutional investors across the globe were optimistic about GDP growth, inflation and bond yield premiums in European emerging markets prior to Russia’s invasion of Ukraine. However, among responses received after the invasion, only 55% of institutional investors were optimistic.
Despite decreased optimism around European emerging markets, emerging markets as a whole are appealing for institutions. More than half (64%) of institutional investors report that they plan to increase (somewhat or substantially) their asset allocations to emerging markets fixed income over the next 24 months.
The top three reasons that institutional investors cite for increasing their allocations included: diversification benefit versus current holdings (56%), highly liquid market (48%) and favorable ESG prospects (47%).
“Despite market headwinds, global institutional investors recognize the need to diversify to provide both higher yields and insulation from market and geopolitical volatility in other asset classes,” said Simon Lue-Fong, Head of the Fixed Income Boutique at Vontobel. “Emerging markets fixed income can meet those needs in investor portfolios but requires an experienced active manager to navigate the unique challenges associated.”
When investing in emerging markets fixed income, institutional investors globally indicated the top challenges their institutions face as: concern about default rates and debt load (51%), liquidity (48%), volatility (45%) and concern about corporate governance, data quality and transparency, and reporting standards (38%).
“These concerns are not new; the asset class is still treated as an exotic niche by many investors. However, for active investors that understand the asset class, it offers enormous opportunities—the impact of default rates is often exaggerated and volatile periods offer excellent opportunities to exploit market inefficiency,” commented Lue-Fong.
Investors activate ESG mandates in emerging markets fixed income
Given the heightened importance of monitoring ESG factors in emerging markets, almost all (91%) of institutional investors across the globe report using ESG investment strategies in their emerging markets fixed income allocation, including: impact investing (55%), systematic screening to include or exclude securities (54%) and engaging with issuer management to influence ESG policies and practices (49%).
Despite the widespread adoption, institutional investors report several barriers that hold their institutions back from making ESG-focused investments in emerging markets fixed income: data inconsistency by third-party providers (62%), skepticism about the positive impact of ESG investments (61%), the perceived higher risk associated with emerging markets fixed income (43%) and the lack of suitable ESG offerings from external asset managers (43%).
“Within the last few years, ESG has become table stakes for institutional investors, and emerging markets fixed income investors are finding that the asset class presents a unique position to generate returns while making a positive impact,” said Lue-Fong. “Our study found that institutional investors are more interested than ever in sustainable investment products and rely on the expertise of active managers to identify attractive and sustainable investment opportunities while managing the unique risks inherent in emerging markets.”
About this research
A copy of the study can be downloaded here . This study examines investors’ interest in fixed income assets in emerging markets and their expectations for altering their allocations in the next two years. Institutional Investor’s Custom Research Lab composed a questionnaire with Vontobel Asset Management to examine investors’ views on emerging fixed income markets. The questionnaire was fielded in February-March 2022 and includes responses from 342 investment decision makers at insurance companies, public and private pensions, foundations, endowments, family offices, and sovereign wealth funds in Europe, Asia, and the Americas. In total, 47% of respondents were received before Russia’s invasion of Ukraine, and 53% were received after the invasion. To supplement the survey findings, 10 investment decision makers at institutions in Asia, Europe, and North America were interviewed. All the interviews took place after Russia’s invasion of Ukraine.
Vontobel Asset Management
Vontobel Asset Management is an active asset manager with global reach and a multi-boutique approach. Each of our boutiques draws on specialized investment talent, a strong performance culture and robust risk management. We deliver leading-edge solutions for both institutional and private clients. Our commitment to active management empowers us to invest on the basis of our convictions. We deliver value through our diverse and highly specialized teams. Employing more than 450 professionals worldwide – including 200 investment specialists – we operate across 16 locations including Switzerland, Europe and the US and create strategies and solutions covering equities, fixed income, multi-asset, and alternative investments. The goal of achieving excellent and repeatable performance has been fundamental to our approach since 1988. A strong and stable shareholder structure guarantees our entrepreneurial independence and protects the long-term mindset that guides our decision-making.
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