NEW YORK–(BUSINESS WIRE)–The war in Ukraine has added continued volatility to emerging markets fixed income assets. According to a study published by Vontobel Asset Management, institutional investors in Canada and around the world are wary of the war’s market and economic impacts but remain optimistic for the months ahead.
Vontobel surveyed more than 300 institutional investors and discretionary wealth managers globally in North America, Europe and Asia-Pacific during the first quarter of 2022. According to the survey, 72% of institutional investors across the globe were optimistic about GDP growth, inflation and bond yield premiums in European emerging markets prior to Russia’s invasion of Ukraine. However, among responses received after the invasion, only 55% of institutional investors were optimistic.
Despite decreased optimism around European emerging markets, emerging markets as a whole are appealing for institutions. More than half (65%) of Canadian institutional investors report that they plan to increase (somewhat or substantially) their asset allocations to emerging markets fixed income over the next 24 months.
The top three reasons that Canadian institutional investors cite for increasing their allocations included: a highly liquid market (60%), diversification benefit versus current holdings (55%) and favorable ESG prospects (50%).
“Despite market and geopolitical headwinds, Canadian institutional investors find that emerging markets fixed income investments provide both the liquidity and diversification that they need to find attractive returns,” said Simon Lue-Fong, Head of the Fixed Income Boutique at Vontobel. “Emerging markets fixed income can meet those needs in investor portfolios but requires an experienced active manager to navigate the unique challenges associated.”
When investing in emerging markets fixed income, Canadian institutional investors indicated the top challenges their institutions face as: liquidity (51%), volatility (51%) and concern about default rates and debt loads (49%).
“These concerns are not new; the asset class is still treated as an exotic niche by many investors. However, for active investors that understand the asset class, it offers enormous opportunities the impact of default rates is often exaggerated and volatile periods offer excellent opportunities to exploit market inefficiency,” commented Lue-Fong.
Investors activate ESG mandates in emerging markets fixed income
Given the heightened importance of monitoring ESG factors in emerging markets, almost all (98%) of Canadian institutional investors report using ESG investment strategies in their emerging markets fixed income allocation, including: systematic screening to include or exclude securities (59%), impact investing (54%) and engaging with issuer management to influence ESG policies and practices (51%).
Despite the widespread adoption, Canadian institutional investors report several barriers that hold their institutions back from making ESG-focused investments in emerging markets fixed income: data inconsistency by third-party providers (76%), concern about the impact of ESG investments on portfolio performance (64%) and skepticism about the positive impact of ESG investments (57%).
“Despite adoption among nearly all Canadian institutional investors, our study revealed that many investors are still finding challenges when it comes to ESG investments in emerging markets fixed income and are not yet convinced of the positive portfolio impacts,” said Victor Schraner, Senior Relationship Manager, Canada. “Now more than ever do active asset managers have an opportunity to show their value proposition to Canadian institutional investors by identifying the best attractive and sustainable investment opportunities while mitigating risk.”
About this research
A copy of the study can be downloaded here. This study examines investors’ interest in fixed income assets in emerging markets and their expectations for altering their allocations in the next two years. Institutional Investor’s Custom Research Lab composed a questionnaire with Vontobel Asset Management to examine investors’ views on emerging fixed income markets. The questionnaire was fielded in February-March 2022 and includes responses from 342 investment decision makers at insurance companies, public and private pensions, foundations, endowments, family offices, and sovereign wealth funds in Europe, Asia, and the Americas. In total, 47% of respondents were received before Russia’s invasion of Ukraine, and 53% were received after the invasion. To supplement the survey findings, 10 investment decision makers at institutions in Asia, Europe, and North America were interviewed. All the interviews took place after Russia’s invasion of Ukraine.
Vontobel Asset Management
Vontobel Asset Management is an active asset manager with global reach and a multi-boutique approach. Each of our boutiques draws on specialized investment talent, a strong performance culture and robust risk management. We deliver leading-edge solutions for both institutional and private clients. Our commitment to active management empowers us to invest on the basis of our convictions. We deliver value through our diverse and highly specialized teams. Employing more than 450 professionals worldwide – including 200 investment specialists – we operate across 16 locations including Switzerland, Europe and the US and create strategies and solutions covering equities, fixed income, multi-asset, and alternative investments. The goal of achieving excellent and repeatable performance has been fundamental to our approach since 1988. A strong and stable shareholder structure guarantees our entrepreneurial independence and protects the long-term mindset that guides our decision-making.
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