ESG Investing - Part I
PGIM experts join David Hunt to explore trends across the ESG investment landscape.
In the first installment of PGIM’s new “In Conversation” series, Host and PGIM’s Chief executive officer, David Hunt, welcomes Sarah Moreno, Emerging Markets Equity Portfolio Manager, Jennison Associates, and Cathy Hepworth, Head of Emerging Markets Debt, PGIM Fixed Income. During the conversation, the three assess the outlook for emerging markets, including the fiscal stability of emerging markets, the economic need for bailouts, and the potential risks and opportunities emerging markets may present to investors in the coming months.
>> Greetings, welcome, and thank you for joining. This is the first in the PGIM video series on important investment topics brought on by our current pandemic. Today's topic is emerging markets. As you can imagine, emerging markets have been hit really hard by the current situation and caused a lot of increased risk right across the spectrum. But not all countries are created equal. And there's been a lot of opportunities that have been created out of this as well. And we're going to cover some of the core investment risks and theses in the next couple of minutes. I'm very pleased to be joined by two world experts on the topic of emerging markets. Cathy Hepworth, who is the head of our emerging markets team in PGIM Fixed Income, and Sara Moreno who is a managing director and portfolio manager at Jennison Associates. So, welcome to both of you and thank you for joining. We've obviously seen a lot of kind of deglobalization happening over this last year. We've seen bank lending fall. We've seen an awful lot of trade declined fairly dramatically. We've seen demand for exports change. How does that change the underlying economic proposition for equities across emerging markets?
>> Yeah, so we've seen nationalism is leading to a breakdown of relations between countries, and certainly having a detrimental impact on global trade. And so this is going to have an impact on economies and also companies. So we're monitoring this trend. We still see it as very fluid, as many countries are still going through electoral cycles. So things could still shift. But we are focusing more on the opportunities within emerging markets. And these can occur regardless of the economic or political backdrop. So we're focused on companies that are, you know, able to drive their own growth, able to serve the unmet need of a local customer to bring forth disruptive technologies, address a large customer base, which these exist and in abundance within emerging markets. And then we see, for example, in cases like China, where that economy is increasingly being led by the consumer, that even though deglobalization can occur, there'll be sectors that will still thrive. And even if deglobalization does continue to occur and local supply chains are built, this will create winners and losers, and therefore there will still be investment opportunities.
>> So Cathy, just building on from that, obviously, we've seen a lot of emerging economies' need for real bailouts. We've had a record number of economies approach the IMF. How are you seeing the fiscal stability of emerging markets? And how is that affecting the way in which you're investing in debt?
>> Yeah. So, there really has been a bifurcation within the different emerging market economies in terms of their ability to access the markets for increased fiscal needs and as well as the ability and willingness to go to the IMF to ask for help, either with special programs or through established programs. So while debt sustainability has been an issue, even for some major economies such as Brazil and South Africa, there are mitigating factors in both of those countries, the fiscal deficit this year is going to be close to 16%. And there were clearly, you know, let's call it preexisting conditions, you know, fiscal weaknesses to begin with. But policy matters and policy effectiveness, and in the case of Brazil and South Africa, they're pretty credible central banks and deep local markets. So they're able to fund themselves when it comes to the need for this extra fiscal spending. The level of debt going forward is going to matter. And what will be key is how they address some of the structural issues. Some of the lower rated emerging market countries and particularly those in Sub-Saharan Africa, who clearly needed access to the IMF, or for example, needed to renegotiate some bilateral lending, for example, with China or engaged in other sort of bilateral debt forgiveness types of actions, those helped. And the fact that there was a willingness among some of these countries and some of them who have significant oil exposure, such as a commodity sensitivity, such as Angola, has helped stabilize the situations there. It doesn't mean that there weren't some countries who did end up having to default or brought forward the default and I include countries such as Argentina and Ecuador. But importantly, because we've seen a recovery, because of some of the measures that we already talked about, this isn't necessarily going to lead to widespread default in emerging market countries.
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