INVESTING IN EMERGING MARKETS

Jerry Orosco, Vice President and Portfolio Manager at Intercontinental, was recently quoted in this U.S. News & World Report article called "7 Emerging-Market Funds to Buy and Hold", and wrote this blog post as a follow-up piece with his full thoughts:

At Intercontinental Wealth Advisors, we continue to like Emerging Markets equity and debt. The asset class as a whole has grown and matured significantly over the years and has remained resilient in recent market volatility. We are also excited about opportunities developing in Frontier Markets, which are economies below the Emerging Market threshold. These emerging economies can provide a good level of diversification for investors and should not be ignored.

US investors tend to bundle EM into a single investment, but, for example, Emerging Asia is very different than Emerging Europe, Emerging Africa or Latin America. That being said, within Emerging Markets, at Intercontinental we like the growth and resiliency we’ve seen in Emerging Asia. China for example has moved from an agricultural economy to an industrial economy where global manufactures rushed to take advantage of the low-cost production capabilities. This led to the development of local companies and industries and the development of a bigger and stronger middle class, which has brought us to where China is now. Nowadays, China is more of a Tech hub and the development of a stronger middle class has been evident in the power of the Chinese consumer. This is a trend we see throughout Asia, not just China. India, Korea, and Taiwan all look a lot different now that what they did just a decade ago.

One of the most notable benefits of investing in emerging markets is growth expectations. As I mentioned, Emerging Asia looks much more attractive than even its other EM member nations. Not only are growth expectations higher in Emerging Asia, but so is the potential of growth within the capital markets. By this I mean that the size of the investable market has more room to grow, and we can see the number of publicly traded companies increase in that part of the world. In terms of valuations, EM companies as a whole are also cheaper if you’re looking at metrics like P/E or Price to Book ratios. For income seekers, dividends and bonds spreads are also more attractive, but we always need to consider the risks.

There are several additional risks associated with investing in emerging markets. Some of the most important ones to keep in mind are geopolitical, regulatory, currency and liquidity. For example, on the equity side, the recent halt to Ant Group’s IPO took investors by surprise. But these risks also apply to the debt side. Investors participating in the debt market have experienced pain as well, especially in situations of defaults or restructuring. 2016’s bankruptcy of Oi SA, the biggest in Brazil at the time, led to a 4-year court battle in which some investors suffered due to complex local laws and procedures. Investors' participation in the Republic of Venezuela and PDVSA bonds, the state-owned oil company, had to deal with not only a default, but also an embargo that froze their ability to trade those positions.

At Intercontinental, we use a few different funds and ETFs in the Emerging Market space. On the equity side, funds managed by JP Morgan and Lazard have great track records and they invest in the themes and sectors that resonate with what we’re looking for. If you’re curious to learn about a more focused ETF that invests in the consumer, e-commerce and tech aspects of emerging markets, EMQQ (The Emerging Markets Internet & Ecommerce ETF) is a good place to look. On the bond side, Nuveen’s TIAA-CREF Emerging Markets Debt Fund (TEDNX) is a great place to start. The fund invests across the full spectrum of EM debt, including government and corporate bonds, local and hard currencies. TIAA-CREF’s fund gives our clients access to an institutional approach to investing with a solid discipline and methodology.

At Intercontinental, we are always monitoring and looking for opportunities around the globe. For additional information or questions, please reach out to your financial advisor.

Sincerely,
Jerry Orosco
Vice President and Portfolio Manager