European emerging markets 'offer growing opportunities'


European emerging markets offer the potential for relatively low correlation to global risk factors, Barings's Matthias Siller has said.

Speaking to FTAdviser, the lead manager of Baring Emerging Europe Plc, explained there were “very interesting developments happening now” in emerging European markets, in particular around corporate governance.

He said: “We think this is a good precondition to have relatively uncorrelated returns, in emerging European markets relative to global emerging markets, but also general equity risk – that is something that will be sought after by investors; the potential for relatively low correlation to global risk factors."

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He continued: “Secondly, there's a very good dividend underpin.”

He said this was particularly important in the current climate where there is a strong hunt for yield. 

He continued: “I would like to stress the interesting combination that the emerging European yield component has... it is not primarily based on yield alone. 

“It is also based on the fact that this yield is generated from a relatively low payout ratio.”

He added: “The improvement of efficiency will lead to, in various companies, a situation where this dividend payout ratio can be increased further, so they will have a very strong argument for increasing dividends rather than only stagnating dividends.

“Even in an environment where you get better growth as wealth, the dividend growth in emerging Europe could actually be quite interesting.”

To avoid some of the political risks that come with being exposed to a country like Russia in an investment portfolio, he warned that “an emerging European component in anybody's strategy should only be one addition and not a major part of it.”

Nevertheless, he pointed out that investors were rewarded for political risk factors.

He explained: “It creates a relatively low hurdle for companies to surprise investors on the positive side. 

“Markets have so far created an environment where it has become relatively easy, especially for Russian companies, to impress investors by their attitude towards various factors such as efficiency and environmental, social and corporate governance, and the rewards for that could potentially be quite interesting.”

Finally, on whether he had taken any particular action in terms of managing recent global trade problems, he said: “In our risk, relative to the benchmark, we are mostly stock pickers, so about three-quarters of our relative risk is idiosyncratic.

“We have been taking action not so much with regard to trade wars but what we focus on is, of course, operational efficiency and ESG parameters.”

He added: “That is the battleground at the moment where a lot of things are moving really fast.”