A lack of transparency and sound data remain huge challenges in many emerging markets. So how should investors assess the risk of investing in emerging markets given the inefficient access to information? How does ‘economic transparency’ affect asset prices? The panel discussed the link between governance principles, asset prices, trust in government and investment volatility and what investors can do about it.[vc_quotes layout=”accordion” 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Key takeaways
Sovereign transparency helps improve the value of assets, enables countries to lower their borrowing costs and achieve a better credit rating.
The discount rate on assets shrinks as transparency improves resulting in assets going up in value.
Key points that help sovereign transparency include economic data being published in English and regularly updated.
Economic development and transparency are linked, making transparency crucial for emerging markets.
Transparency does not create more volatility but higher levels of sovereign transparency don’t necessarily increase levels of trust in a government.
Some countries (like Ukraine) have relatively high levels of transparency, but struggle to subsequently enforce rules and laws to deal with the challenges transparency reveals.
Asset owners have an important role in engaging on transparency.
Swedish buffer fund AP1 uses a corporate scoring process whereby more transparency increases a company’s weighting in its index investment.
AP1 has begun excluding fossil fuels from its entire exposure. The process has included launching some new funds and strategies with managers.
The decision was based on the fund’s climate and scenario analysis and the financial risk posed from fossil fuel groups.
In many cases, companies have the data investors want disclosed, but are often not aware of it.
The big difference between the vaccine rollouts and the scale of the stimulus measures across the world could result in a K-shaped global economic recovery, with much of the developed world booming but poorer countries continuing to struggle. However the
Investors discuss how technological change and the new green economy is re-pricing assets in infrastructure, as well as the trend to substitute fixed income with infrastructure debt. But investors should not to lose sight of traditional infrastructure characteristics in their quest to tap new trends. Predictable cashflows and downside protection remain central.
Research that looks at the relationship between economic transparency and defining investment qualities such as yield spreads, credit ratings and stock price volatility shows sovereign transparency helps improve the value of assets, enables countries to lower their borrowing costs and achieve a better credit rating.
Inflation holds investor opportunities as well as perils. Emerging markets, commodities and linkers do well in a climate of rising prices while central banks are likely to act quickly and aggressively in response rather than early or gradually.
The unprecedented level of government debt signals sub-par economic growth ahead, warned Farouki Majeed, chief investment officer, Ohio School Employees Retirement System speaking at FIS Digital alongside Rich Randall, head of global debt at IFM Investors.
Inflation is the number one investor concern and whether it is here to stay was the subject of much debate at the Fiduciary Investors Symposium. While its longevity is contested it was agreed that its presence has important implications for the correlation between bonds and equities which creates problems for portfolio design. Investors at PGIM, QMAW, CPP Investments and NEST discuss.
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