Christian Charest: For Morningstar, I'm Christian Charest. After a strong start in January, so far, the rest of 2018 has not been good for emerging markets investors. With China embroiled in a trade war with the United States among other unfortunate events, Canadian funds that invest in emerging markets equity have lost almost 6.5% on average over the past six months, while emerging markets fixed income funds are down 1.5%. But the portfolio managers at Fiera Capital are bullish on emerging markets right now. To discuss why, I'm here today with Candice Bangsund, Vice President and Portfolio Manager at Fiera.
Candice, thank you very much for being with us today.
Candice Bangsund: Thanks for having me.
Charest: So, let's start with the causes of the recent underperformance, both for stocks and bonds. Why have they done so badly?
Bangsund: Well, not surprisingly, the emerging market assets in general, whether it be on the equity or the fixed income side, have suffered the brunt of the weakness associated with the escalating trade tensions, particularly as it pertains to the U.S. and China. As well, we've got an environment where the Federal Reserve is raising interest rates, the U.S. dollar has been strengthening. There's a fear that this is going to make it harder for some of these countries to fund their external deficits. So, there is a lot of uncertainty directed specifically into the EM space. And like I say, this is where we are seeing a lot of the U.S.-China trade tensions really impact the markets.
Charest: Your portfolios at Fiera are currently overweight in emerging markets. Why are you optimistic on these markets?
Bangsund: So, we like both emerging market equity and emerging market debt in this environment. Particularly, after the latest pullback, we think it's offering quite a compelling buying opportunity. And the reason is really a matter of fundamentals and fundamental strength in the emerging market economies in general. We've got stronger global growth, emerging market GDP growing at twice the pace of the developed markets, improved financial positions in some of these regions as well allows them to withstand higher borrowing costs from the U.S. So, again, we just feel that in the context of the latest pullback and more attractive valuations, this is producing quite a compelling buying opportunity, both on the equity and the fixed income side.
Charest: Speaking of the fixed income, Fiera is the sub-advisor of a new ETF that was just launched called Horizons Active Emerging Markets Bond with the ticker HEMB. Within the management of that fund are there any particular areas of emerging markets that you think are more promising than others right now?
Bangsund: Absolutely. And that's the benefit of actively managing a product like this. We can identify market dislocations and opportunities on a tactical basis to add value for our clients, and the timing is great for the launch of this strategy. Right now, our top overweight position is in Mexico, for example, which similar to what's happening in Canada, that NAFTA overhang has seen spreads widen quite substantially and unfairly in our view. The U.S. growth story should be beneficial for the Mexican economy as well. So, we think that things have gone a little bit too far there, and from a valuation perspective, Mexico is looking really compelling on the fixed income side.
Similarly, and quite surprisingly, Argentina is another area where we are seeing some opportunity. Spreads have really skyrocketed there, and valuations are looking to be pricing in a lot of the bad news. We are seeing some structural reforms in Argentina as well. IMF support has just been announced there as well, which is going to be positive for their fiscal positions going forward, offering a really attractive yield obviously to help compensate for some of the perceived risks as well. So, between Mexico and Argentina, those are our top overweights.
Of course, on the other hand, there are pockets of vulnerability, and top of mind is Turkey. And this is an area where we are underweight in the strategy. Financial vulnerabilities, central bank and government intervention, some uncertainty and lack of confidence in the policy making in Turkey in general leaves us a little bit pessimistic on that region in EM.
Charest: And how would you sum up your forecast for emerging markets in general for the short and intermediate-term?
Bangsund: We remain -- similar to our overlying view on risk assets -- we are cautiously optimistic. I think in the near term, you could see some periodic bouts of volatility, particularly as the trade situation continues to unfold. But longer term, we do remain optimistic on both the fixed income and the equity side in emerging markets. Valuations, extremely compelling; fundamentals continue to be supportive and hence why we remain overweight both on the equity and the fixed income side.
Charest: Thank you, Candice. Always good to hear from you.
Bangsund: Thanks for having me.
Charest: For Morningstar, I'm Christian Charest. Thank you for watching.
