May 31, 2018 (BE2C2) — BlackRock, the world’s largest fund management firm says three countries that they are either avoiding or in some examples have shorts in their portfolio are the Philippines, Turkey, and Pakistan. Reason: these countries’ economies are overheating, or they think the currencies are substantially overvalued or both – Pakistan Rupee has devalued over 12 percent since December with many experts predicting it could lose another 5 to 8 percent in months ahead.
“Yes. I mean, at the moment, our view is on the emerging markets, we are broadly positive with a couple of exceptions. And the exceptions for me at the moment would be the Philippines, will be Turkey, and will be Pakistan. Those are all countries that we are either avoiding or in some examples have shorts in our portfolio for the reasons that we think that the countries are – the economies are overheating, or we think the currencies are substantially overvalued,” says Emily Fletcher, Co-Manager of the BlackRock Frontiers Fund (BRFI).
The reason is “because we are dollar investors. So, you wouldn’t want me to turn around at the end of the year and say I have done fantastically well. Your funds are up 200% in kwacha,” Fletcher explains.
BRFI concentrates on the ‘Forgotten Forty’. According to Fletcher, “you have the developed markets, which I think are very distinct to emerging and frontier. And then you have really the rest of the world, the emerging and the frontier markets. And within that, we don’t invest in the top eight emerging markets, the largest eight, which represents around 85% of the emerging market benchmark.”
“We think it’s therefore about 85% of where most people are invested in emerging markets, 85% of people’s time. And therefore, really the rest remain sort of the Forgotten Forty and submarkets, that’s what we think is really interesting. The three countries BRFI are avoiding belong in this submarket.
According to Fletcher, the Forgotten Forty are generally overlooked by a typical investor who doesn’t really have the time or the scale to be able to focus on these small markets which take a lot more time. And therefore, there’s opportunities for alpha in these less efficient markets. So, we focus on those smaller emerging and frontier markets.
BlackRock is a bottom-up stock picker. So the overlay of macro because of the dollar considerations, and the geopolitical rumblings in some of these countries can be far louder than in developed markets, says Flectcher.
“And we think that those problems will manifest in what happens in the equity market and you will lose money – when the currencies get very overheated in our markets and you do have a big devaluation, well the equity market tends to be positively correlated and you lose money both on the currency and the equity markets. So, those countries (Philippines, Turkey, Pakistan at the moment are a big avoid for us.
The global firm has a new tool for investors to evaluate the impact of geopolitical risks on their portfolios — the geopolitical risk indicator identifies the top 10 global threats to investors.
BlackRock’s geopolitical risk indicator also shows when the market may be unprepared for certain global shocks, with Italy’s populist parties failing to form a government being one example. The political turmoil in Italy, where the president had called snap elections, also impacted the Pakistan Stock Exchange as foreigners once again offloaded stocks.
The firm’s indicator had also signaled that concern around European fragmentation was below average, according to Mateos y Lago, chief multi-asset strategist for the BlackRock Investment Institute.
When events unfolded in Italy, the stock and bond markets declined in the country and spread to the U.S. as investors reassessed the impact of the moves.
BlackRock is the largest asset management firm in the world – it manages more than $6 trillion including its iShares business.