Institutional investors ignorant of emerging market risks – BNY Mellon

GLOBAL - Emerging market debt might be appealing for institutional investors looking for high returns, but many are still ignorant of the risks involved, according to BNY Mellon.

Speaking at a recent BNY Mellon conference in Paris, Alexander Kozhemiakin, head of emerging markets at Standish, and Colm McDonagh, head of emerging market debt at Insight, agreed that institutional investors too often "underestimate" risk in emerging markets and should pay more attention to the "reality" behind returns.

"In the developed world, where companies and governments are too preoccupied by deleveraging, emerging countries represent real opportunities," Kozhemiakin said.

"However, investors should ask themselves why those poorest countries keep a lower GDP than developed economies, and the fact is that they have not had the capacity to develop as fast as they should have done."

Both Kozhemiakin and McDonagh cited political risk, as well as lack of transparency.

Kozhemiakin added: "If we were to consider a country like Russia, for instance, I wouldn't touch corporate debt with a stick, as the level of corruption completely blurs the potential returns made - I would instead look at sovereign debt."

McDonagh said institutional investors would do well to diversify their emerging market portfolios by looking at debt, equities and currencies.

"There is always a risk to bear with emerging market-denominated currencies, as they are similar to zero-coupon guarantees issued by governments in some ways," he said.

"The management of position on such currencies therefore depends on central banks' policy measures, which have been mixed over the past years."

McDonagh lamented the fact that institutional investors had largely ignored emerging markets and argued that they should allocate as much as 30% of their total portfolio to the asset class.

"If 30% seems aggressive, investors should keep in mind that emerging market GDP might be half of global GDP in 10 years' time, so such an allocation might not seem surprising by then," he said.