The Emerging Markets Investors Can’t Ignore

While unpredictability is often a hallmark of emerging markets in Europe, the Middle East and Africa, it does not apply to the region’s leading sell-side analysts.  

For a sixth year in a row, Bank of America Merrill Lynch has topped Institutional Investor’s Emerging Europe, Middle East, and Africa Research Team. Citi remained in second place, breaking last year’s tie with J.P. Morgan, which rounded out the top three.

The seventh annual ranking of the region’s top research providers was based on responses from more than 770 portfolio managers and buy-side analysts managing about $380 billion in emerging EMEA equities and $395 billion in emerging EMEA debt. Twenty-one investment sectors across three categories – country and region, industry coverage, and economics and strategy – were covered by the survey. In addition to placing first overall, BofA Merrill Lynch also topped each of those three categories.

“You have a responsibility to try and provide continuity,” said Simon Greenwell, head of EMEA research at Bank of America Merrill Lynch, when asked about his firm’s success in a region comprising such disparate markets. “We’ve consistently maintained a local presence and coverage in these markets. Having that local understanding, which you align with global expertise, is clearly what you’re trying to capture.”

According to Greenwell, BofA Merrill Lynch covers approximately half the emerging stocks from London and the other half locally. “I think that mix is important,” Greenwell said. With teams covering four different geographies, “communication and collaboration is key.”  

The region became even less homogeneous over the past year, according to Dmitry Dmitriev, global head of research at VTB Capital, which this year improved its standing in the team rankings by one spot to fifth place. “Specifics of the country and local as well as global macro and political environment matter much more for investment cases than they used to in the past,” he said. “Given global headwinds, investor horizons shortened to favor dividend plays versus growth stories.”

Still, politics can also be a positive catalyst, according to Heath Jansen, head of research for Central and Eastern Europe, the Middle East, and Africa at Citi. He cited an optimism surrounding South Africa, where a change in leadership earlier this year has “raised expectations for a series of reforms, although these will take time.”

In addition to political changes, the year was marked by renewed concerns driven by weaker currencies and higher U.S. interest rates, said Sunil Garg, head of international equity research at J.P. Morgan.

“Current account deficits, where they exist, have become a central concern for clients in [emerging markets], and this has been reflected in currency weakness,” he said. “Combined with the prospect of further interest rate increases in the U.S., investors have turned more cautious in recent months.”

Volatility also remains a key challenge for the sell-side in emerging markets, according to Greenwell. “You can have a market such as Russia where you can go 12 or 18 months where there's no interest and then suddenly something changes,” he said. “It is peaks and troughs.”

Citi’s Jansen agreed that Russia was a laggard due to concerns over sanctions and political risks, but emphasized that 2017 was still a “strong year” for global markets overall.

“Although the EEMEA region lagged other emerging regions, a number of our markets were strong performers, including South Africa, Turkey, Greece, and especially Poland, which rose over 50 percent,” he said. “The year saw a revival of both trading volumes and capital market activities in the region, both of which bode well for the deepening of equity markets.”

In these emerging markets, the opportunities can be as large as the challenges, according to J.P. Morgan’s Garg. “We believe that emerging markets continue to reward investors with an attractive growth opportunity,” he said. “While we recognize the associated volatility, the superior earnings growth is a balancing factor.”

In certain frontier markets, Jansen reported broader optimism and growing client interest. “After a challenging period, frontier African equity markets, both north and south of the Sahara, are having a strong year, and we believe this should continue,” he said.

Saudi Arabia — spurred by its all-but-certain upgrade to MSCI emerging market status this June — represents the biggest opportunity in EEMEA, he added.

“This is a deep and liquid market which is in the midst of a reform drive,” Jansen said. “Many investors are yet to be involved but are likely to do so as the market joins the international equity indices.”

It is a market people are going to find very difficult to ignore over the next two years if they aren’t positioned yet, added Bank of America Merrill Lynch’s Greenwell. 

While local and geopolitics are out of their control, firms are focusing on their strengths. “We see in-depth industry and company knowledge as core to the strength of our analysts,” said J.P. Morgan’s Garg.

A new analyst-based ranking, produced by II for the first time this year, provides some insight into which firms have the strongest individual analysts. While BofA Merrill Lynch and Citi remained in first and second place, respectively, ranking the firms this way propelled VTB Capital to third place. 

As VTB’s Dmitriev explained, the qualities that make up a top analyst are “a combination of hard work, ability to focus on truly important issues, high level of flexibility and professional curiosity, and a bit of art and personal charisma.”