What lies beneath: The hidden truth of EM commodities

Emerging market (EM) countries have borne the brunt of the recent commodity price collapse: the Institute of International Finance estimates global investors pulled US$735bn out of emerging market bonds and equities in 2015, the worst capital flight in 15 years.[1]

But we believe the popular view of emerging markets as predominantly commodity-dependent net exporters – is a mistaken one. For some EM countries, energy is a key export; while for others (Latin America, for example) exports are predominantly soft commodities and metals. In Asia, with one or two exceptions, countries are mainly net importers, particularly of energy. Across emerging markets, just 44% of countries are net exporters, while 56% are net importers.[2]

We think these nuances matter. They demonstrate the importance of viewing emerging markets not as one monolithic whole but rather as a broadly differentiated set of investment opportunities and challenges.

Rodica Glavan – Insight, a BNY Mellon company

[1] Bloomberg: ‘Emerging Markets Lost $735 Billion in 2015, More to Go, IIF Says’, 20 January 2016

[2] JP Morgan: ‘EM exposure and vulnerability to commodities revisited’, 9 March 2016

Emerging market (EM) countries have borne the brunt of the recent commodity price collapse: the Institute of International Finance estimates global investors pulled US$735bn out of emerging market bonds and equities in 2015, the worst capital flight in 15 years.[1] But we believe the popular view of emerging markets as predominantly commodity-dependent net exporters – is a mistaken one. For … read more

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How millennials are changing food industry choices

Changing US consumption patterns are forcing big change in the food industry. Millennials don’t tend to eat three square meals a day like their parents. Millennials graze, often eating just one meal a day, supplemented with three to four nutritious snacks. This new way of eating favours small local food companies whose brands emphasise quality ingredients and sell through non-traditional channels with higher ‘snack occasion’ penetration.

Large companies are slowly responding. Some snacking leaders are launching new products, such as plant-based chips and nut snacks and repositioning ad campaigns to stress ingredient quality. Other companies have resorted to small bolt-on acquisitions to meet these consumer demands. However, most large-scale food companies acknowledge their inherent disadvantages on this new playing field and are focusing more on margin management to grow earnings. Some also view large-scale consolidation as a way to facilitate this margin strategy. Time will tell if these changes are durable and if larger snack manufacturers can adapt.

David Sealy, The Boston Company Asset Management, a BNY Mellon Company

Changing US consumption patterns are forcing big change in the food industry. Millennials don’t tend to eat three square meals a day like their parents. Millennials graze, often eating just one meal a day, supplemented with three to four nutritious snacks. This new way of eating favours small local food companies whose brands emphasise quality ingredients and sell through non-traditional … read more

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Can fund managers avoid the wrath of regulators in their portfolios?

Following the financial crisis of 2008, we have seen extreme monetary policy intervention in markets as authorities have sought to counter global deflationary pressures and weak growth. While we expect this to continue (and potentially to become even more extreme and intrusive as the years go on), a new wave of state intervention in the corporate sector is also on the rise.

There are a number of potential causes of authorities’ ever greater interest in corporate life:

  • A cultural shift towards increased corporate scrutiny and accountability to the public
  • Politicians’ desire to find scapegoats (for example in the banking sector)
  • Weak government finances and the need to raise revenues
  • The low-growth backdrop, and the focus on protecting/favouring domestic companies
  • The wish to prevent a repeat of previous misdemeanours

One way to demonstrate the scope of state intervention in the private sector is to look at some of the largest corporate fines over recent years. With these fines likely to be detrimental to shareholder wealth, they are of considerable interest to investors and our global sector analysts.

We think it is necessary to be wary of sectors which are politically sensitive at times of election or hung parliaments since politicians are prone to try and score points by attacking unpopular industries. Additionally, we watch out for local bias, as regulators and governments typically favour local incumbents over foreign competitors.

Matt Brown – Newton, a BNY Mellon company

Following the financial crisis of 2008, we have seen extreme monetary policy intervention in markets as authorities have sought to counter global deflationary pressures and weak growth. While we expect this to continue (and potentially to become even more extreme and intrusive as the years go on), a new wave of state intervention in the corporate sector is also on … read more

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Contending with political uncertainty

It is surprising how well markets fared after the shock UK referendum result. Clearly, the exit of the UK from the EU is going to be a protracted process and the economic consequences will only become apparent with time. For now, it is viewed as a UK-specific economic issue, with some European ramifications, rather than a global concern.

If anything, the additional uncertainty, combined with modest rates of growth and little inflationary threat, has served to push government bond yields lower, easing financial conditions and prompting investors to move abnormally high levels of cash into other assets in search of yield and return.

Markets will have more political uncertainty to contend with in the months ahead, in the form of the next EU summit (in September) and referendums in Hungary (on EU migration policy in September) and Italy (on constitutional reform in October). Given the UK referendum result, sensitivities will be high. Then, of course, we have the US presidential election.

Steve Waddington – Insight, a BNY Mellon company

It is surprising how well markets fared after the shock UK referendum result. Clearly, the exit of the UK from the EU is going to be a protracted process and the economic consequences will only become apparent with time. For now, it is viewed as a UK-specific economic issue, with some European ramifications, rather than a global concern. If anything, … read more

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What’s behind the EMD resurgence?

In the wake of the Brexit result, flows into riskier assets have increased as investors search for assets that are not subject to very poor liquidity and are offering some yield. EM debt in particular has continued to benefit from record inflows.

In EM, our allocation is very much influenced by our ‘Mind the Gaps’ theme, which recognises the increasing heterogeneity of economic and sovereign debt prospects (across and within regions) in a challenging global growth environment.

Consequently we feel long-duration exposure in countries characterised by sensible policy making/structural reforms and solid fundamentals – such as low debt levels and improving external positions looks attractive. In our view, some of these still offer relatively attractive spreads and capital appreciation prospects (e.g. Colombia and Indonesia). However, at the front-end stable credits/positive growth stories (such as Morocco and Vietnam) can be complemented by selective imminent USD obligations in lower rated and high-yielding countries. We view these as benefiting from stable adequate reserves and/or IMF programme support (e.g. Belarus and Ghana).

Paul Brain – Newton, a BNY Mellon company

In the wake of the Brexit result, flows into riskier assets have increased as investors search for assets that are not subject to very poor liquidity and are offering some yield. EM debt in particular has continued to benefit from record inflows. In EM, our allocation is very much influenced by our ‘Mind the Gaps’ theme, which recognises the increasing … read more

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