Aegon AM's Grills on EM Markets Outlook

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Bloomberg Jan 9 02:55 · 5423 Views

Jeff Grills, Head of EM Debt at Aegon Asset Management, discusses his outlook and investments strategies for EM markets. He speaks with Annabelle Droulers on "Daybreak Australia".

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Transcript

  • 00:00 As EJ just said,
  • 00:01 perhaps China's impact is sort of starting to wane now.
  • 00:06 Well, I think that's right.
  • 00:07 You know, I think the
  • 00:08 economy has shifted to a lower growth model.
  • 00:11 It couldn't sustain the close to double digit types of
  • 00:14 of growth that we had
  • 00:16 this, this year, This past year we saw 5%.
  • 00:18 We're thinking we're going to get close to 4 1/2 to 5% this year.
  • 00:21 I think the main beneficiaries are the other countries in Asia that are picking up where
  • 00:26 China maybe is dropping off some,
  • 00:28 Indonesia, Vietnam, the other regional plays.
  • 00:31 And so
  • 00:32 I do think that as a region, Asia will continue to be a very important one to watch for
  • 00:37 the commodity exporters.
  • 00:38 And so we're watching
  • 00:40 producers of materials, nickel,
  • 00:44 lithium, the things that actually are going to benefit China
  • 00:46 in the
  • 00:47 in the EV market.
  • 00:48 So I think that's one place where China can see some growth though is in the EV market.
  • 00:54 It's interesting you say about the sort of commodity link producers.
  • 00:57 Does that play into your preference for Africa then?
  • 01:01 Well, that's part of it.
  • 01:03 We do have a favourable view on Africa today.
  • 01:06 Some of that is in the energy sector.
  • 01:08 So Angola is
  • 01:10 a primary
  • 01:11 exporter.
  • 01:12 They've dropped out of OPEC, so that will give them some freedom on the production side.
  • 01:15 And we do think that
  • 01:16 with oil price where it is, they'll benefit.
  • 01:19 We haven't seen as much issuance from
  • 01:21 the EV linkages in China.
  • 01:23 We did see
  • 01:24 issuance out of Indonesia SQM and Chile issued recently,
  • 01:29 which is going to be
  • 01:30 increasing their production in lithium.
  • 01:33 I don't expect it quite as much in Africa, but Africa tends to be a great opportunity because it trades wide relative to many of the other opportunities in EM.
  • 01:41 And we do think there's some very interesting plays that will happen in 24 in Africa.
  • 01:47 Something else that stood out to me in your notes was the the opportunities that you're seeing in Ukrainian corporates as well.
  • 01:53 And that's sort of
  • 01:54 perhaps a little bit of a contrarian view.
  • 01:57 Well, sort of.
  • 01:58 I, I
  • 01:58 mean the
  • 01:59 Ukrainian corporates have continued to perform well.
  • 02:02 They had a moratorium on their coupon payments for the first six months after the war
  • 02:07 started in 2022.
  • 02:09 Since that time they've been current and we continue to think that
  • 02:12 despite some struggles that we're seeing in Ukraine with the war,
  • 02:16 some funding problems that they have, they continue to do very well.
  • 02:20 So bond prices remain in the 60 to $0.70 range.
  • 02:24 We think that for 24 they will continue to be current.
  • 02:27 Much of this will depend on what happens with the war, what happens with funding.
  • 02:31 But even in a scenario where they may have to get some sort of restructuring, I think it'll still be relatively creditor friendly.
  • 02:38 So we do have a maybe somewhat contrarian view and and it's maybe a little bit overlooked as Europe has really diminished as a
  • 02:45 role for EM investors,
  • 02:46 given just the absence now of Russia and other markets there.
  • 02:51 You're still highlighting the geopolitics as the main risk for emerging markets generally over the course of 2024.
  • 02:58 So what else are you sort of watching for?
  • 03:02 Well, I do think the growth outlook for 24 is going to be very important.
  • 03:05 We have revised down our view for the potential for a recession in the USI think that that's a big driver of where we'll see growth in for global markets.
  • 03:14 So I I do think that we're getting this nice backdrop for EM assets with yields near 8% that creates a very high and attractive incentive for people to invest.
  • 03:24 Geopolitics is is always at the
  • 03:26 fringe, but we don't see that as a major concern.
  • 03:30 The elections this weekend in Taiwan will will produce maybe some depending on which candidate wins,
  • 03:35 but we don't see that escalating to too much of A of a problem, at least not at the time being.
  • 03:40 The lessons of Russia are still something very weighing very much on the mind of
  • 03:44 of China and its leaders.
  • 03:45 And so I don't think that they necessarily want to go down a path of increasing too much conflict, but probably keeping up the rhetoric.
  • 03:52 So we don't see geopolitics as a major risk, but it's always one in the end that you have to monitor.
  • 03:59 What about the valuations?
  • 04:01 That is sort of a challenge around EM debt broadly as well.
  • 04:05 Well, again we haven't seen these types of yields in
  • 04:09 close to a decade.
  • 04:10 So with the index at 8% we've we've done work that shows that that the yield you enter tends to be
  • 04:16 consistent with the types of returns you can expect over the next three to five years.
  • 04:20 The big challenge we have is that all of the all of fixed income hasn't seen these type of yields in the last decade.
  • 04:25 So when you look at where investment grade EM at 130 basis points over compares to US corporates at about 100,
  • 04:32 there's not as much value as you'd like to see being an investor in emerging markets.
  • 04:35 So
  • 04:36 I'm not necessarily bearish, but I think from a relative value standpoint, EM will still be challenged
  • 04:42 relative to to some of the other fixed income options.
  • 04:44 And finally,
  • 04:45 last year was a big year in outflows.
  • 04:48 That's one that we'll watch.
  • 04:49 If we start getting some inflows, that might be something that provides a Technical Support to the market which would provide a better return opportunity for 24.