Emerging market mandated hedge funds have delivered exceptionally strong gains this year – the asset weighted US dollar denominated Mizuho-Eurekahedge Emerging Market Index is up 7.59% for the year, with underlying equity long/short hedge funds for the index gaining 9.75% in the seven months through July. Hedge funds running dedicated exposure to India, China and Latin America have all posted double-digit gains year-to-date and have been the key contributors to the stellar returns posted by emerging market mandated hedge funds.
Technical factors are broadly supportive. Sovereign issuance is relatively low net of coupons and amortisations and, in terms of valuations, EM debt looks reasonably attractive versus developed market corporate bonds following the yield spread widening that occurred over the summer.
Emerging markets have performed poorly in recent years with moderating economic growth and disappointing earnings. However, frontier markets have outperformed as investors have recognised that robust domestic economic growth can be translated into strong earnings growth at a company level. Frontier markets have outperformed global and regional emerging markets in three of the last five years. African and Middle Eastern markets have been the main drivers of this outperformance, while Asian and Latin American frontier markets have lagged. In fact, in economic terms Africa today is similar to the emerging markets of Asia and Latin America fifteen years ago (Figure 1).
Emerging markets are attracting greater attention from investors as they become a more important part of the global economy. However, optimism about the opportunities that economic development could bring is usually accompanied by concerns about the corporate governance standards of companies in those markets.
The last few years have seen an upsurge of interest in the theme of the so-called “emerging markets” (EM). For most of the past decade, sentiment towards EM has been generally bullish, but there are moments when perceived excessive euphoria leads to talk of “bubbles” and the like. This happened to some degree ahead of the first Fed rate hike in 2004, and it happened much more dramatically in the aftermath of the global financial crisis of 2008.
Sustainability in a corporate context is a company’s ability to operate in a manner that does not damage the environment or deplete a resource. Clearly, the concept represents a responsible approach to investing. But sustainability is also a business approach that creates long-term shareholder value. It does this by capturing opportunities and managing risks that derive from the rapidly evolving global economy: as global economic growth shifts from the developed world to the BRIC countries (Brazil, Russia, India and China), these economies are experiencing rapid population growth, mass urbanisation and industrialisation with all their potential dangers for the environment.
The stars are aligned for a substantial rise in cross-border mergers and acquisitions this year as the global economy recovers and financing becomes more readily available. There is considerable pent-up demand as a result of deals postponed in the past 12 months when companies focused on making sure they had adequate cash on hand to survive the crisis, analysts say. CEOs are hunting for foreign acquisitions that make strategic sense and that are likely to boost their companies’ earnings as economies around the world rebound. The best prospects for economic growth are in the emerging markets.
Emerging economies now capture a larger share of global private equity activity than ever before and the markets are quickly maturing as investors take more controlling stakes in companies.
Statistics from the Emerging Markets Private Equity Association (EMPEA) showed that the emerging markets share of global private equity fundraising has risen from 5% in 2004 to 20% as of June 2009 and from 7% to 24% of global private equity investment totals during the same period.
We now have confirmation of what everyone has been living through: fundraising and investment levels in emerging markets fell by over 50% in the first half of 2009 compared to the same period in 2008, according to the latest figures put out by the Emerging Markets Private Equity Association (EMPEA). A total of 84 emerging market funds raised US$16 billion in the first six months of 2009, way down on the US$36 billion garnered in H1 2008. Investment figures tell the same story.
Sustainability is a responsible approach to investing, as well as a business approach, that creates long-term shareholder value by capturing opportunities and managing risks that derive from the rapidly evolving global economy. Such changes include the shift of economic growth to the BRIC countries (Brazil, Russia, India and China), a fast-expanding global population, mass urbanisation and the industrialisation of the developing world.
In the real estate world, the mantra is “position, position, position”. The same may be said for hedge funds based in Latin America. Proximity to the real action gives local managers an advantage over funds managed at a distance. We would not have said this in the mid-1990s when Latin America was an intense focus of investor interest in major financial centres and there was a proliferation of emerging markets mutual funds. It was perceived that the best perspective was achieved from a distance (on high?) looking towards the region from the northern hemisphere where one could observe matters without all the baggage that local investors and naysayers brought to the process.
Investing in emerging market hedge funds is a completely different activity from investing in emerging markets. Investing, unhedged, in emerging market securities, is a long-term bet on the growth of the corporate sector of the developing world, and, at points in the cycle, a shorter-term bet on the risk appetite of global investors. The following figure shows the roller-coaster ride that a directional emerging market investor would have experienced over the past ten years.
Judging by the number of conferences and other events focused on them in recent months, the emerging market hot spots for hedge fund investment are China and India.
They seem like logical plays - two enormous countries, each with more than a billion people, rapid growth and a fast-rising upper and middle class.
There should be, and indeed are, a wealth of opportunities to be taken in these growing economic powers - both in terms of investment opportunities and potential new hedge fund investors. But there are also a number of barriers to jump and risks to assess before doing so. This has become particularly evident this week, as the Indian exchange fell 4.2% on Monday amid a worldwide downturn.
Orbix Global Partners are pioneers in emerging markets trend-following. Eurekahedge caught up with Luciano Correa to talk about their recentky-launched offshore Emerging Trends fund.
Emerging market debt has only become a recognised asset class for fund managers in the last 15 years. Although emerging markets (formerly called developing countries) have always relied on foreign debt to develop, it has traditionally taken the form of trade finance or syndicated bank loans. Ironically, the current market, which we estimate to be around US$1,500 billion in size, was born out of the huge defaults on sovereign bank debt during the 1980s. Mexico, Brazil, Poland and Argentina, amongst others, were obliged to default on their sovereign bank loans, which were floating rate at a time when the US Fed was hiking interest rates to historically unprecedented levels.