1. Institutional investors Liabilities and Emerging Markets
Bruno Bonizzi and Annina Kaltenbrunner

2. Background and key message
In 2014 institutional investors held about 30% of global bond and stock markets
Increasingly, they also invest in emerging markets
Liabilities are a primary determinant of institutional investors behaviour
By understanding the role of liabilities, we can understand the stability of asset demand by institutional investors in general and in emerging markets in particular

3. Liabilities and asset choice
Liabilities affect asset choice on two levels:
Assets are classified (and demanded) depending on their ability to face liabilities:
Liability-matching: protect balance sheet from volatility of liabilities
Return-seeking: grow asset size in line with the growth of liabilities
The choice between return-seeking and matching assets depends on how well liabilities are funded, i.e. the funding ratio

4. Assets and liabilities

5. Historical trends
Low funding ratios, low interest rates. Conflictual forces:
Need to generate returns
Need to protect balance sheets from volatility of liabilities
Result: divestment from traditional assets (domestic equities) towards foreign assets and “funds”

6. Shifts in asset allocation

8. Implications
Emerging market assets (incl. bonds) cannot match liabilities:
They bear credit risk (especially if hard-currency)
They are denominated in a foreign volatile currency (if in local currency)
They respond to a different yield curve

9. Implications
Emerging markets are by definition return-seeking so the stability of investments will depend on:
The extent to which return-seeking assets are needed, which depends on funding ratios
The volatile composition of the return-seeking portfolio
Both imply a potentially unstable situation

10. Thank you!