In the Middle East, investors have been focused on maintaining a certain level of income and creating a healthy balance between yield and risky assets. Simon Barrett, head of Middle East and Africa at Jupiter Asset Management has witnessed some distinct trends among his clients.
‘Throughout this experience we have seen a strong focus on liquidity, more focus upon drawdown management of portfolios, and a desire to balance the need for yield with the risk of the assets they invest in,’ he said.
‘Due to the extreme ‘V shape’ of the equity market recovery there is also interest in equity funds which could continue to thrive in a post covid-19 world.’
The priorities of regional financial institutions remain unchanged, with a focus on finding the best-in-class managers, with stable teams, who stick to their process.
Barret said that client support is still a high priority for banks and these institutions are looking to build relationships with companies that can provide ongoing, tailor-made support for them and their underlying clients, throughout this crisis and beyond.
In the wholesale space, the overriding theme amongst investors remains the desire to obtain a decent real level of income, without eating into capital.
Barret said that the consistency of return is becoming increasingly important with investor risk appetite at lower levels, and there is also a growing interest in the capital appreciation potential that can come with thematic-based equity funds.
On the other hand, in the institutional space, the focus is on achieving optimal portfolio blend. Investors are looking across asset classes with a view to finding good managers who not only have strong, proven long-term track records, but who also blend well with their existing managers and can increase the overall risk/return profile of their portfolios.
Breaking the EM stereotype
Since the global selloff in March, there’s been a flood of negative headlines about emerging markets from worries about debt restructuring and corporate defaults, to the negative impact of a slump in oil and wider commodity prices.
When it comes to EMs, Jupiter strongly suggests looking at each of the 83 countries individually. ‘These headlines do not give the full picture,’ said fixed income fund manager, Alejandro Arevalo. ‘EM is being incorrectly treated as a homogenous universe.
‘While we of course acknowledge that some EM countries will be particularly hard hit by Covid-19, and that those economies are likely to suffer over the longer term, but it does not mean that it will be the case for every EM country,’ Citywire +rated Arevalo added.
The emerging market debt asset class is wide enough to offer diversification across financial instruments, sectors, maturities and ratings.
Popularity of Middle Eastern debt
The Middle East forms a significant portion of the EMD bond universe with the average rating of corporates and sovereigns being some of the highest in the EMD bond universe.
During the pandemic-related market shock, oil price collapsed and yields of very highly rated Middle Eastern sovereign and corporates increased to early 2019 levels, and this provided an attractive buying opportunity which contributed to the increased interest.
According to Arevalo, even though yields have decreased they are still higher than pre-pandemic levels. Therefore, the region still remains attractive.
Sukuk has the extra appeal of having a dedicated investor base and therefore quite often tend to be more stable than non-Sukuk bonds. ‘We think there are significant opportunities in the Middle Eastern conventional and Sukuk bonds,’ he said.
Jupiter has witnessed inflows into the EMD asset class. It remains attractive to the firm due to the higher yield it offers when compared to developed markets.
Arevalo also sees good opportunities in Brazil, Mexico, China and Ukraine, and have identified corporates in those countries that are exporters and provide essential goods and services and have room to take significant economic shock.
‘We think that even if there was a second wave, the credit strength of these corporates should not be affected significantly,’ he said.
Strategy and tactics
Unlike some players, market polarization is not a concern for Jupiter. ‘In periods of heightened uncertainty, we believe a flexible, active investment approach is vital, affording the ability to respond to new information as it becomes available, and to take advantage of attractive opportunities as they arise,’ Arevalo said.
Before the coronavirus outbreak, Jupiter had been adopting a defensive outlook, choosing not to chase the market when some valuations looked stretched and were not reflecting companies’ fundamentals.
Thereafter, when the coronavirus first broke out in China, the firm took the view that the market was underestimating its likely overall impact on global economic growth, reaffirming its more defensive view.
In light of the recent rebound, Jupiter’s outlook remains unchanged. The firm is conscious not to chase the rally, but instead to focus on identifying opportunities through comprehensive bottom-up analysis and the best quality credits with the strongest fundamentals, which are trading at attractive levels.
Arevalo said that this approach has worked well so far. ‘Security differentiation and country differentiation also remain important to us, particularly given the current market conditions, and we continue to closely monitor several macro issues globally.’
He is confident that Jupiter can continue to identify sovereigns and corporates that will be able to withstand the Covid-19 crisis and flourish over the longer term.