Emerging Markets: Smog on the Horizon?

468730223Few would claim that the past few years have been good for emerging-market
investors. But market cycles by their nature turn, and in a recent interview, Mauro Ratto, Head of Emerging Markets, and Qinwei Wang, Macroeconomist China, argue that this difficult period for emerging markets could have set the scene for a recovery.

 ‘Emerging Markets tend to outperform in a stable global economy with low U.S.
interest rates,’ noted Mauro Ratto, Head of Emerging Markets at Pioneer
Investments. Furthermore, after the small hike last year, the Federal Reserve seems
content to keep U.S. rates low, while the International Monetary Fund in April
forecast global economic growth of 3.2% for 2016 and 3.5% for next year. In
addition, the differential in GDP growth between Emerging Market Manufacturing
Countries and Developed Markets is not shrinking, it still underpin the investment
case for Emerging Markets (EM). Given such an environment, Ratto described
himself as a ‘moderate bull’.
Discussions of EM must of course take account of China, which represents 24% of
the MSCI Emerging Markets index, and where Ratto expected annual economic
growth of around 5% over the next five to 10 years. ‘I believe China’s growth is
going to stabilise. We have visible signs of stabilisation and we may be just ahead of
a period of decent growth,’ Ratto remarked. ‘That would be enough to support the
local economy and to provide adequate demand to the rest of the world.’
Qinwei Wang, Macroeconomist, China, at Pioneer Investments, added that slow
economic growth would undermine China’s government and so ‘the policy makers
have the same incentive as the public’. As an example, he pointed out that the
liberalisation of the process for setting interest rates in China had boosted
household income by letting people earn more through their savings products.
‘These kinds of reforms will continue to support consumers,’ Wang stated.

A great deal of attention is nevertheless still paid to debt in China, Ratto
acknowledged. ‘We have to monitor the pace of credit growth; It has been a debt
fuelled recovery yet again’ He highlighted that much of the problem is concentrated
in state owned enterprises and in property market. ‘On current metrics, we do not
see an overleveraged private sector. Low household debt and strong income growth
support consumer sector’ he commented.
The real estate sector leverage is a risk to the financial sector, though, which makes
active management vital in China. ‘It is a good market to discriminate in by sector,’
argued Ratto.

The same is true of emerging markets more broadly. ‘You need to reconcile your
macro views with stock picking opportunities,’ Ratto explained.
Emerging-Market businesses are also making themselves more attractive to
investors. ‘A lot has to come from private-sector corporate governance, and there
are signs of life,’ reported Ratto. An example is a trend towards paying dividends.

‘That is a critical step forwards, as it shows that companies care about their
Elsewhere, Ratto pointed to interesting opportunities from Brazilian exporters
benefitting from the cheaper local currency and emerging technology companies
offering strong growth while also being more profitable than many of their
developed-market peers.
‘I think we are just ahead of a good period of performance for emerging markets.
That is based both on a valuation case and on a fundamental case for emerging
economies,’ Ratto said. He estimated that emerging markets equities could return 7-
8% a year from here, with the caveat that investors need to be selective about their

‘There is always a way to find opportunities in emerging markets,’ Ratto
summarised. ‘There will always be risks, but knowledge is a way to help offset some

About Mauro Ratto

Mauro Ratto is Head of Emerging Markets. In this role, he is responsible for leading a highly skilled investment team working on debt and equity strategies that covers Asia, Latin America, Emerging Europe, the Middle East and Africa. Mauro is also Lead Portfolio Manager of Pioneer Funds – Euro Strategic Bond and a Co-Portfolio Manager on our Global Emerging Market Equity mandates. Prior to his current appointment, Mauro was Head of Investment Management Europe and Asia. In this role, he was responsible for Portfolio Management and Trading teams across emerging as well as developed markets concentrating on fixed income, equity, absolute return, balanced and fundamental research, as well as single strategy hedge funds. He is a member of the Global Investment Committee and is a director of Pioneer Investment Management Limited. A guest lecturer at the faculty of Political Economy of University of Genoa and an Economics graduate of the same university, Mauro has been part of UniCredit S.p.A., which owns Pioneer Investments, since 1989. In 1998, he moved to Dublin to join Pioneer Investments as Head of Global Portfolios, later adding Fixed Income to his title. He was Head of Portfolio Management, Europe (2002-2004), before taking on the role of Head of Investment Management Europe and Asia.
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