HSBC Global Asset Management Global Head of Institutional Sales Barbara Rupf Bee talks to Chris Panteli about the move away from fixed income, growing interest in emerging market debt and the changing role of hedge funds
The trends in developed versus emerging markets are quite different. In terms of developed markets, there are problems. For example, in the euro region there are issues with Greece and the downgrade of Spain. However, by contrast, there are more upgrades in emerging markets. There is a difference in the health of the emerging markets, for example they have improving corporate governance and financial household figures. In many cases, they are a lot healthier in terms of their country balance sheet than their developed counterparts.
Chris Panteli: Does that mean the jitteriness surrounding emerging markets has now disappeared?
Barbara Rupf Bee: No, nervousness is still there but investor behaviour within different geographic regions is at different stages of evolution. In developed pension markets in terms of asset allocation it is clearly already recognised and they have a steady stream of investors coming in. In areas where asset allocation does not include an allocation toward EM debt, more education is needed.
The biggest take-up has predominantly come from continental Europe, followed by a large interest in Australia and Japan. Currently, interest is increasingly coming from the US, where pension funds are now looking more closely. However, if you look at US pension allocations, only approximately 25% goes into non-US allocations and usually that still only goes into global fixed income, so there is much room to grow. In fact, we get more requests for emerging market equities rather than debt from the US and Canada. They feel more comfortable doing global fixed income only, but I think that will change; it’s just a matter of becoming more informed. In Europe it took us a good year of solid education regarding EMD before we saw the fruits of our labour.
Chris Panteli: Are these changes purely the result of a need to diversify?
Barbara Rupf Bee: There are two elements. We’re seeing a big shift in the world in terms of emerging and developed markets. Developed markets are not all what they seem any more in terms of safety and security while the emerging markets are starting to grow up. The EM term might not even apply anymore as it used to.
There’s a shift in terms of governance and which markets we feel comfortable investing in. If you look at the development of Brazil for example, it is one of the fastest evolving countries I’ve seen in terms of governance improvements in recent years and also one of the most robust. That is clearly getting the confidence of investors and that’s a big vote of confidence in terms of their investment policies.
The allocation cycle for investment grade fixed income is definitely coming to a close, so equity, emerging market debt or going into alternatives are the options people are investigating, and that’s why these moves are coming to the fore.
