Emerging-market investors may have identified the assets that offer sustainable post-pandemic returns. Now they just need to find more of it.

The worst crisis since World War II is prompting some fund managers to rethink their strategies in a world with $13.7 trillion of sub-zero yielding debt and an increasing view that a V-shaped recovery is unlikely. Seeking opportunities in ESG, investments in countries and companies that are improving environmental, social and governance standards, are becoming crucial more than ever as investors navigate the pandemic-stoked market volatility.

“This is a crisis unlike anything we’ve seen and we cannot just go back to our old textbooks anymore that say ‘go buy the dip’,” said Thu Ha Chow, a money manager at Loomis Sayles Investment Asia Pte, who has been investing since Enron’s collapse. “The social and governance elements are going to be more important, but they can be harder to find in emerging markets.”

The conundrum lies in the scarcity of such true assets and the difficulty of identifying them in developing economies.

While ESG-focused developing stocks and bonds have trounced returns of traditional peers as the pandemic raged, they’re a minority across the $28 trillion emerging-market universe. Just $11 billion of the $84 billion raised in bonds this year whose proceeds are applied to projects aimed at helping society came from developing-nation borrowers.

The coronavirus has splintered the world economy, exposing social responsibility and governance fault lines across continents. The fallout has been worse in less developed nations, which typically dedicate about 5% to 6% of GDP to health spending. That’s less than half the 14% average of wealthier countries.

As Brazil and India overtake the likes of Italy and Spain as pandemic centers, funds are scrutinizing the shelf life of their investments as emerging markets face their first annual contraction in six decades.

“EM markets which have relied more on natural resources and traditional manufacturing business will face a more uncertain future.” -- Adrian Zuercher, co-head of global asset allocation at UBS Wealth Management

The pandemic has “put focus on the critical need to build resilience in healthcare, food and water security, and across supply chains,” Ingrid Kukuljan, head of international impact investing at Federated Hermes in London, wrote in a note. “We will increasingly see governments transfer funds to the private sector to address these pressing needs, which has proven true during this crisis.”

While such bets have paid off -- a gauge of ESG stocks has gained 4.4% in the past year compared with a 3% rise in a broader EM index -- the lack of good research into such assets is hampering the market, money managers say.

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