With ongoing interest rate hikes, inflation running at forty-year highs, and continued instability in several regions, emerging markets are moving swiftly in various directions, an investment teams at insurance organisations might be struggling to catch up.2022 was particularly tricky year, and so far 2023 has been interesting as well, said Laura Sarlo, Emerging Markets Portfolio Manager at Liberty Mutual.
In a recent Clear Path Analysis report, “Insurance Asset Management, North America 2022”, several senior industry players – including Sarlo – discussed the macroeconomic trends markets are currently experiencing, including inflation, growth, interest rates, and geopolitics.
"The market in 2022 closed to lower quality borrowers, and more
countries are seeking IMF and other multi-lateral help.”
In a panel discussion, Sarlo was asked about emerging markets and their relationship to major developed economies – especially those in which central banks and treasuries have been seeing difficulties. “Emerging markets is an interesting space at the moment,” she said “The market in 2022 closed to lower quality borrowers, and more countries are seeking International Monetary Fund (IMF) and other multi-lateral help.”
“If anyone stares at their Bloomberg [newsfeed and market updates] too much, they will see that there is a lot of stress on emerging market sovereign creditors, for instance the recent default in Sri Lanka.”
In March 2023, Sri Lanka agreed to terms of a bailout after several disastrous years, which saw the government collapse, with senior officials fleeing and the price of goods skyrocketing for consumers. The country received its first part of a $3 billion IMF payment in mid-March after six months of negotiations, and begins its next round of talks with creditors in the third week of April, President Ranil Wickremesinghe said when the lifeline was announced.
“Sri Lanka has been facing tremendous economic and social challenges,” said Kristalina Georgieva, Managing Director, IMF, said following the issuance. “[With] a severe recession amid high inflation, depleted reserves, an unsustainable public debt, and heightened financial sector vulnerabilities."
Georgieva also noted the IMF’s official statement that institutions and governance frameworks required deep reforms in the country. “For Sri Lanka to overcome the crisis, swift and timely implementation of the EFF-supported program with strong ownership for the reforms is critical,” she said.
Next steps for the country include getting a debt restructuring agreement in place and organising monetary policy and tax reforms.
“Conditions aren’t getting better with dollar funding costs rising for some of the emerging markets,” Sarlo said about the wider emerging markets sphere. “Other emerging market economies, mostly the large investment-grade economies are less reliant on dollar funding. The sovereigns over the last 15 years have deepened their local capital markets and they have become better at having well established, local bond curves supported by pools of domestic savings.”
“We also face a slower China and a slowing global economy, which is always tough
for emerging markets that are sensitive to raw commodity price.”
She added that sovereigns are relatively less exposed than they would have been if the market had seen this dollar move 15-20 years ago, but, even so, the players would still have had to create room in the budget to manage these higher funding costs. “We also face a slower China and a slowing global economy, which is always tough for emerging markets that are to a large extent quite sensitive to raw commodity price.”
This raised the point of which emerging markets would fare better in coming cycles – with food, commodities, and energy prices all looking particularly volatile. The debate about whether resource-rich countries would do better in the mid-term is something that Sarlo encouraged insurance investment teams to consider.
“The more vulnerable economies are those that have been reliant on food or energy imports,” she said. “When you map out emerging markets there are pros and cons to all of them,” she added, joking that all the markets in her portfolio were like children she loved equally.
“There are some [markets], such as Latin America, where they tend to be more energy self-sufficient and many of the countries in this region are also food sufficient as well,” she continued. “They are relatively less exposed to some of the worries around the impact of Russia/Ukraine on global wheat exports or the impact of global energy prices.”
Several Latin American portfolio managers told Insurance Investor last year that a lack of data and resources was hampering investments in their countries – especially in classes such as real estate. However, there was agreement on Sarlo’s point that their commodity and resource-rich economies shielded them from some other pitfalls of the global markets, such as post-COVID supply chain issues and the ensuing economic problems.
That being said, Sarlo added that Latin America had a lot of political noise, which meant it remained a difficult place to operate.
“While there are pros and cons to all [markets], the regions that are suffering the most are parts of sub-Saharan Africa,” She added. This includes economies that many insurance investors are not particularly familiar with because they tend to be quite low-rated sovereigns.
The IMF said that sub-Saharan Africa had major potential but was still underdeveloped. “Sub-Saharan Africa offers a spectrum of debt, equity, and fund investment opportunities that should encourage both the international and the domestic investor,” it said in a paper called “Sustainable Investing in Sub-Saharan Africa: Better Data, More Knowledge, Using Technology”, published from its Mobilizing Investment in Africa seminar.
"It is important to be mindful because this has a
geopolitical impact."
“Long-term investment flows have not kept pace with the region’s potential, or with the investment flows that are occurring elsewhere,” the report said, adding that one of the main reasons for this trend was the lack of solid and useable data.
Sarlo said that despite these pitfalls, regions that house emerging markets must be included in plans. “It is important, even if these markets are not that integrated into the global capital markets or a large part of people’s portfolios, to be mindful because this has a geopolitical impact and knock-on impact on some of the larger economies, in addition to the humanitarian impacts,” she added.
With 2023 showing no slowdown in geopolitical turmoil, themes around emerging markets – and what to monitor there – will likely continue to pull focus for investment teams at insurance organisations.
