Know your investment objectives and your market.
Identify your fund’s liability profile.
If the fund’s objective is paying out a certain number of scholarships annually or to meet pension obligations, equity indices might steer asset allocation the wrong way, when buying bonds would have been a much more suitable choice of investment for such a fund.
Be prepared for future trends that incorporate an ESG (Environment, Social & Governance) perspectives.
ESG adaptation is coming either via litigation or regulation. Therefore, funds should incorporate a more holistic view of capital to include non-financial forms of capital (for example, social capital and knowledge capital).
Understand that each EM market has its own characteristics.
Malaysia has a high domestic institutional participation in the local stock market which makes it a good investment should it drop 30-40%, because it is like a “cash proxy”. Whereas in China, high retail participation and lack of data quality make investing in the stock market more akin to gambling in a casino.
Adjust your expectations of future returns.
High EPS growth in EM countries pre-GFC is not a God-given right in the post-GFC era.
Before the 2008 Global Financial Crisis (GFC), nominal GDP growth rates for EMs were at all-time highs, and corporate revenue was highly geared to GDP growth. As a result, 10-15% EPS growth rate was expected, and investors thought this would be the case for the next 20 years. But the post-GFC environment proved to be lacklustre, with many corporates’ supply chains not ready for margin compression when nominal GDP growth rates slowed down.
Clients are perpetually demanding even if returns expectations are unrealistic.
Even if you generate alpha of 10%, but if the broad market is down by -8%, your absolute return is only 2%, which makes it hard to justify to clients why they should be paying fees.
It is getting more difficult to find winners amongst equities in EM Asia.
If you want to find two- or three-baggers, they are still more likely to be found in EM Asia. However, this space is getting narrower and these companies are getting harder to find.
Execute with an open mind.
Know your strengths.
Are you good at picking fund managers or allocating assets? Fight the battles that you can – you cannot replicate what someone else is doing if you don’t have the same skillsets or talent.
Corporate debt space in EM Asia is booming.
Bonds can be as attractive a way to play EM Asia as equities, but fund managers who invest in EM Asia more often than not look mostly at equities. If you require only 4-5% return p.a. there’s no point in taking equity risks with 10-20% volatility when fixed income can achieve just that with lower risk.
Algorithms and AI can be used for both fundamental and technical analysis.
Machine learning can be used to uncover manipulations of companies’ financial statements, or to trawl Chinese social media to capture retail sentiment.