Jürgen Maier: «Emerging Markets will continue to become more and more important for the global economy and capital markets »

Emerging Markets (EM) are often considered as a short to medium-term opportunity rather than a pure long-term investment. Firstly for structural reasons (growing emerging might become developed) and secondly due to the nature of investment opportunities. What is Raiffeisen Capital Management’s view?

Raiffeisen Capital Management is convinced that the Emerging Markets will continue to become more and more important for the global economy and capital markets, as these countries exhibit significantly higher rates of economic growth than the developed markets. Furthermore, the newly industrializing countries in Asia and Latin America are saddled with far less debt than America, Europe and Japan, and the good fiscal situation has made it possible for many governments in the Emerging Markets, such as China and Brazil for example, to take large-scale measures to stimulate economic activity during the crisis.

It will also take a long time until the current fastest growing Emerging Markets like China, India, etc. are even close to become a developed market. Brazil and Russia have currently a GDP/capita of around 8.000 USD, China of around 4.000 USD and India of only 1.000 USD. A developed market has normally a GDP/capita of more than 20.000 USD that would mean if we take China as example it would have to quintuple the current GDP. Therefore, it will take a few more decades until we can call countries like China and India developed markets.

What are the main reasons to invest in EM right now? And what are the available investment vehicles?

Stimulus measures by the governments and robust domestic consumption are key factors that have helped many Emerging Markets weather the economic crisis relatively well and return to growth quite quickly. In order to move forward on this successful path and remain competitive, the Emerging Markets will have to undertake massive investments in infrastructure in the years to come. This will occur primarily in China, India, Russia and Brazil. Other countries such as Mexico, Argentina, South Africa and South Korea will also continue to invest billions in the coming years on roads, airports, railway networks, on expanding energy, waste treatment and water supply systems, on building public institutions such as schools, universities and hospitals, and on developing telecommunications networks. This will secure jobs and income, helping to expand households’ financial opportunities.

In general, Emerging Markets funds are particularly suitable for investors who want to profit from the political and economic convergence process in those markets.

Jürgen Maier

The developing middle class in the Emerging Markets is increasingly aiming for a standard of living modeled on the Western world, and thus there is enormous demand for consumer goods. For example, aggregate spending on consumption in the Emerging Markets is now greater than that of the USA. China, for instance, has taken over from the USA as the world’s largest market for automobiles: in 2009 alone more than 13 million new vehicles were sold there. Despite this, the number of vehicles per 100 inhabitants is still just about 8, which corresponds to the level in the USA from 1928! Another example is the mobile telephone market in India, where more than 15 million new customers are being added month in, month out, while at the same time the penetration rate is still less than 50%.

Raiffeisen Capital Management was one of the first European fund management companies to focus on Eastern Europe’s equity markets. This early expertise in Emerging Market equities and bonds (first investment in 1994) has since been expanded into a core competency of Austria’s premier fund management company. In the course of the following years, the company has extended its EM-expertise towards Asia and Latin America and is now an internationally renowned and awarded Global Emerging Markets fund manager.

Bond funds:

• Raiffeisen-EmergingMarkets-Rent
• Raiffeisen-Osteuropa-Rent

Equity funds:

• Raiffeisen-EmergingMarkets-Aktien
• Raiffeisen-Osteuropa-Aktien
• Raiffeisen-Euroasien-Aktien
• Raiffeisen-Russland-Aktien

Today, EM offer various types of underlying (equities, real estate, bonds, debts, commodities, private equity…) and various geographical locations. Can you provide more insights on how to allocate an emerging portfolio?

With the cycle of interest rate hikes already very advanced in some emerging markets, hard-currency emerging markets bonds and especially local-currency emerging markets bonds delivered positive results again in the past weeks. Yields are no longer increasing now: Inflation rates appear to be approaching their peak, and interest rate expectations have now stabilized. There have also been a lot less signs of economic overheating in the emerging markets recently. We expect that local-currency bonds in particular will be able to profit from currency appreciation in the coming months.

Raiffeisen Capital Management was one of the first European fund management companies to focus on Eastern Europe’s equity markets

Jürgen Maier

Regarding equities, capital outflows from the emerging markets have stabilized considerably, and amongst the emerging markets, Eastern Europe has done particularly well in the past weeks. In valuation terms, emerging markets equities appear to have average to favorable valuations and should therefore post gains over the medium term.

Liquidity seems to be an issue when it comes to invest in EM, how do you deal with?

A lot has changed in the last decades and liquidity is not a big issue anymore in Emerging Markets. Brazil, China, South Korea and Taiwan are almost comparable to some western markets. There is also a big choice of ADR’s and GDR’s available which means that Emerging Markets companies have a second listing next to their home country in New York or London, which increases liquidity in these names.

More difficult are smaller markets like the Philippines and Vietnam, where liquidity is still an issue and investors sometimes cannot invest into a stock they like because of liquidity constrains. However, as the importance of even small Emerging Markets countries increases, we also see a lot of new IPO’s in these markets and so we think that the liquidity situations will improve also for the smaller markets in the coming years.

Who are the main investors in EM right now? Can you provide the profile (if any) of a typical EM investor?

There is no typical EM investor. Both, institutional clients and retail clients want to benefit from the opportunities of these markets. Raiffeisen Capital Management is targeting both groups. In general, Emerging Markets funds are particularly suitable for investors who want to profit from the political and economic convergence process in those markets. Along with the development opportunities in these Emerging Markets, one must expect considerably stronger fluctuations in share prices and exchange rates.

We have recently seen an increase in geopolitical and social risks in the emerging world. Do you believe it will affect investors’ assessment on EM?

The unrest in North Africa could increasingly draw investors’ attention towards the political risks associated with investments in the emerging markets. However, emerging markets equities held up very well despite the turbulence resulting from the events in North Africa and Japan. In past few weeks, emerging markets equities outperformed the developed equity markets in local-currency terms. In particular, there has been less uncertainty regarding interest rate developments in recent weeks, with the end of the interest rate cycle becoming apparent in some countries.

The implementation of new regulation frameworks such as Solvency II will surely affect the structure of institutional investors’ portfolios. How do you address the issue within Raiffeisen Capital Management?

Raiffeisen Capital Management is constantly monitoring all relevant legal developments and aim to offer the involved institutional investors appropriate investment solutions.