Coups and Defaults Can’t Beat Brexit as Investors’ Top Worry

  • Scandals pale in comparison with break-up of EU: NN Investment
  • Pendulum swings to emerging world with BlackRock at forefront

It doesn’t matter how many coups, bond defaults and corruption scandals emerging markets endure this year, their risks pale compared with developed peers.

A survey of 83 money managers commissioned by NN Investment Partners revealed that Brexit and the potential breakup of the European Union was deemed the biggest investment threat. That’s not to say political turmoil from the Philippines to South Africa isn’t giving money managers plenty to worry about; the difference is they’re getting double-digit returns from developing-nation stocks and bonds and settling for much less in advanced countries.

“It’s not the absolute level of risk that’s important, but it’s how risks are moving up or down the scale,” said Patrick Moonen, a Hague-based strategist at NN Investment, a money-manager spun out of Dutch financial firm ING Groep NV with $219 billion under management. “In Europe, it’s clearly moving up, whereas in emerging markets it’s more stable.” 

The relative stability is helping to draw funds from powerhouses BlackRock Inc. and Pacific Investment Management Co. to the developing world, already benefiting from rising commodity prices and accelerating growth. As long as risk perceptions in advanced markets remain high, emerging countries can extend this year’s 14 percent stock rally, according to Moonen.

Half of international money managers said Britain’s plan to leave the EU is their top concern, NN Investment’s August survey showed. Back in December, a third cited an emerging-market crisis as the biggest worry. Now it’s only a quarter. The mood is reflected in the flow of money: emerging-market debt funds recorded their 17th consecutive week of inflows last week, according to Bank of America Global Research.

The survey results are all about perception, according to Moonen, while in reality political risks are as elevated in the developing world as they have always been. In the past four months alone, Turkey has quashed a military coup, South Africa’s finance minister has been summoned to court amid a struggle for control of the country’s finances and the Philippines announced plans to sever ties with the U.S.

Investors were stung last week when Mozambique’s government announced a second debt restructuring this year, while an investigation into corruption at Brazil’s state-run oil giant continues to ensnare new members of the business and political elite.

Still, there are other factors helping to underpin investor confidence in the developing world. Their economies are forecast to grow 4.6 percent in 2017, widening the gap with advanced peers to 2.8 percentage points, according to the latest International Monetary Fund estimates. And even after this year’s equity rally, stocks are trading at a 22 percent discount to shares in developed markets.

“When fundamentals improve, the focus turns back to valuation,” Moonen said. “Emerging markets are clearly less expensive than developed markets.”

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