How M&G is finding opportunities across emerging markets, March 2018

Buoyed by a brighter economic outlook, particularly in China, and higher corporate profits, the share prices of emerging market companies have rallied since the beginning of 2016. Over this period, they have outperformed share prices in developed markets.

Meanwhile, investors’ appetite for emerging market bonds has been supported by the limited returns on offer from more traditional income-generating assets in a climate of low interest rates. An improving outlook for global economic growth has also enhanced the perceived creditworthiness of emerging market governments and companies that have issued bonds.         

As always, it is worth remembering that the risks of investing in emerging markets can be higher than investing in developed markets. Emerging markets are generally smaller, more sensitive to economic and political factors, and investments there are less easily bought and sold.

After an impressive period of recent performance for emerging markets, our investment teams at M&G remain optimistic that selective investors can still find value in emerging markets through a flexible and globally diversified approach.

M&G Global Emerging Markets fund – picking out long-term value 

Emerging markets often attract attention because of their higher growth prospects. Matthew Vaight, manager of the M&G Global Emerging Markets fund, which is on the Chelsea Selection, believes investors in these regions should look through the excitement and focus on companies.  In his view, corporate performance is the key driver of long-term stockmarket returns.

For Matthew, one of the most interesting developments in emerging markets today is a sustained improvement in corporate culture. He observes that as companies are becoming better run, there is a greater focus on profits and delivering returns to shareholders.

When searching for promising investments in emerging markets, Matthew concentrates on companies’ essential characteristics - specifically how profitable they are, whether they are well managed and the valuation of their shares. His goal is to find companies whose long-term prospects are being undervalued.

Matthew believes company share prices in many emerging markets are attractively valued, relative to developed market stocks, especially since many are delivering higher profits. Moreover, he thinks the market has not recognised fully the potential benefits flowing from improved corporate performance.

In Matthew’s view, there are exciting opportunities for long-term investors in emerging market stockmarkets – so long as they are selective.

The M&G Global Emerging Markets fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.

M&G Emerging Markets Bond fund – striking the right balance 

Claudia Calich, manager of the M&G Emerging Markets Bond fund, which is on the Chelsea Selection, believes that getting the right blend of assets is the key to successfully navigating the risks of investing in emerging market bonds.

Claudia has the flexibility to invest across bonds issued by both the governments and companies of emerging markets in an unconstrained way. Importantly, for example, she can invest in bonds that are issued in ‘local’ currencies (such as the Brazilian real or the South African rand) and in ‘hard’ currencies (foreign currencies, such as the US dollar). 

This flexibility allows Claudia to construct a portfolio based on her team’s best ideas from across emerging markets, as she aims to generate performance for investorswhatever might be going on in the world.  

Claudia maintains a balanced mix of government bonds that are denominated in local and hard currencies, as well as corporate bonds mainly issued in hard currency. The allocation of the fund across different types of bonds, as at the end of January 2018, is illustrated in the chart below.

In Claudia’s view, having the freedom to invest in corporate bonds (as well as government bonds) creates greater opportunities for investors in emerging market bonds. Not only does it give her a wider choice of potential investments across different company sectors, but emerging corporate bonds can offer compelling opportunities.

When compared to funds that can only invest in bonds issued by a relatively small number of emerging market governments, Claudia believes her fund’s flexibility allows it to potentially offer investors a more attractive balance of risk and reward. 

Chart: How the M&G Emerging Markets Bond fund is allocated

Source: M&G, 31 January. Please note, portfolio data is based on internal sources, is unaudited and may differ from information as shown in the Monthly Fund Review.

The M&G Emerging Markets Bond fund allows for the extensive use of derivatives.

Important information

Changes in currency exchange rates will affect the value of your investment.

When you're deciding how to invest, it's important to remember that past performance is not a guide to future performance, and that the value of investments can go up and down. So how much your investments are worth and the income from them will fluctuate over time, and you may not get back the original amount you invested.

The views expressed in this document should not be taken as a recommendation, advice or forecast. M&G does not give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to your intermediary.

This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH.