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Emerging-market economies continue to be a source of interest for institutional investors across all asset classes. A recent survey conducted by HSBC Global Research - the HSBC EM Sentiment - suggested that nearly half of the EM investors were ‘bullish’ on EM in the short term, while 71 per cent expected EM growth to improve in the next 12 months.1

Whether it is fixed income, equities, or FX, the search for yield has driven an increasing number of institutional investors to focus and trade markets emerging markets. But with that comes a greater spotlight on both macro and micro-market structure issues, some of which are common across all markets – developed or emerging – whereas others are specific to just EM.

To help understand the implications of the rapid growth in investors’ interest in EM, HSBC recently surveyed more than 120 investors with EM exposure, examining topics such as key drivers behind trading decision-making, market access concerns and opportunities, expectations from the dealer community, and upcoming trends in EM.

Four key themes emerged from these discussions:

  1. Onshore presence, global connectivity
    Over 70 per cent of respondents claim that having a local presence with links to a global network is a key factor in choosing their EM dealers. Those global dealers with a local presence consistently captured around 71 per cent of the trading flow across all regions and asset classes.
  2. Political stability is the most determining factor when choosing to increase EM exposure… followed by liquidity.
    Nearly 60 per cent of respondents cited political stability as the most important factor behind increasing EM exposure (outside anticipated returns); with market liquidity coming close second with 54 per cent. In the analysis below, we will contrast these determining factors within the various asset classes.
  3. ESG is no longer a ‘nice-to-have’ but rather a ‘must-have’.
    Nearly 80 per cent of respondents view ESG considerations as an important element in their EM investment process. This is set to rise to 95 per cent over the next 3 years. While environmental and social issues appear to be the top ESG risks for developed market securities, Governance has been cited by 86 per cent of the respondents as the top ESG risk for EM securities.
  4. Asian securities lead the way for e-trading, and fixed income e-trading has the largest growth potential.
    On average, 42 per cent of Asian securities are traded electronically across all asset classes. Given how electronic FX and Equity are used in the developed markets, it is no surprise that EM investors are also active users of electronic trading. However, investors expect the most robust growth over the next 2-3 years in e-trading to be in EM Fixed Income, by an order of 10-20 per cent across regions.

1 HSBC EM Sentiment Survey, published by HSBC Global Research, September 2020
2 HSBC Sustainable Financing & Investing Survey 2020

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