Emerging-markets rebound hasn't convinced everyone

Last month investors sent $45B into emerging markets, the most money to developing countries in 20 months, despite Fed taper

Jun 20, 2014 @ 2:00 pm

By Trevor Hunnicutt

Investors in May drove the most money into emerging markets in 20 months but at least one fund manager is waiting for more volatility before he's completely bullish.

“A lot of people ran away from emerging markets, the values improved and they came back,” said David Rolley, who helps lead global-fixed-income strategy for Loomis Sayles & Co. “Volatility is at a record low [across stocks, bonds, commodities and currencies]. Investors get braver, particularly the one that have to borrow money.”

“I have to worry about a spread bear market in emerging markets,” Mr. Rolley said at the Morningstar Investor Conference in Chicago. He's buying short-maturity bonds from more reliable emerging-markets firms to avoid duration risk but also earn spread, or a yield premium.

Investors put an estimated $44.7 billion into emerging-markets mutual funds and exchange-traded funds in May, raising the total over the last 11 months to $221.8 billion. May's total was the most since September 2012, when the latest round of quantitative easing was first announced, according to the Institute of International Finance Inc., which released the data this week.

But the low volatility isn't helping, according to Mr. Rolley. He said low volatility is reducing term premiums and spread premiums. He's waiting for two triggers by the Federal Reserve that will increase volatility — the end of the bond-buying stimulus program and the increase, even small, of interest rates.

An announcement that the Fed planned to taper the stimulus roiled markets last June and emerging markets saw outflows of $32.5 billion, according to the IIF data. That was an opportunity for fund managers to seize on the volatility, Mr. Rolley said.

“Just talking about it gave us a more interesting entry level last year,” he said.

Another portfolio manager said some investors have overestimated the risks to emerging markets from the taper.

Justin M. Leverenz, director of emerging market equities for OppenheimerFunds, said he disagrees with an investment thesis called the “fragile five,” coined by Morgan Stanley, that suggests that Indonesia, South Africa, Brazil, Turkey and India are particularly threatened by tapering.

He said the developing world has fundamentally changed since the 1997 Asian financial crisis. In his view, countries such as Russia are slowly but surely making structural improvements while the developed world struggles with slow growth, unemployment and other economic problems.

Still, the overall economic picture of the countries is not synonymous with their potential as investment markets, Mr. Leverenz said.

“You can't confuse macro growth with companies,” he said. “You need to invest in extraordinary companies and not get bothered about where they're domiciled.”


What do you think?

View comments

Recommended for you

Featured video


Top questions surrounding future of DOL fiduciary rule

Reporter Greg Iacurci and managing editor Christina Nelson discuss the biggest uncertainties springing from the Fifth Circuit Court of Appeals' decision to vacate the regulation.

Latest news & opinion

UBS reels in $30 billion J.P. Morgan team focused on Mexico

The five-member team will be based in Miami, Houston and New York.

Higher estate-tax exemption level could mean less work for advisers

With fewer taxpayers affected by the federal estate tax, the demand for estate planning is diminished.

Stocks plunge, advisers tell clients to hang tight

Though planners encourage calm, some are preparing investors for a correction.

Lightyear Capital's Donald Marron said to be in the hunt for Cetera Financial Group

The veteran brokerage executive, who bought Advisor Group in 2016, owned Cetera once before.

What to watch for next with the DOL fiduciary rule

Much hinges on whether the Labor Department appeals the 5th Circuit decision by April 30.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print