The higher levels of growth in emerging economies, especially those in Asia, when compared to the developed world, offer a range of opportunities for private investors. High valuations of Asian stocks, however, along with possible risks of inflation in the region mean many of the best opportunities for accessing this growth may well be found in global companies deriving increasing profits from emerging markets, rather than Asian companies themselves.
“The emerging world recovery has been truly extraordinary; a classic V shape,” says Guy Monson, CIO and managing partner of Swiss bank-owned Sarasin & Partners in London. “We owe a lot of it to the Chinese fiscal programme, which is what I think will be probably regarded as the largest fiscal stimulus per unit of GDP outside wartime in history. But all of this comes at a cost of rising inflationary pressures.”
Guangdong, the export heart of China, recently raised its minimum wage by 20 per cent, while headline inflation in India has risen to 16 per cent, a level Prime Minister Singh described as deeply worrying, says Mr Monson. Vietnamese inflation has doubled to 8.5 per cent in just seven months.
These developments point towards a need for tighter fiscal policy across the emerging markets, he believes, although many governments will find this hard to execute unless the US raises interest rates first, which looks unlikely in the foreseeable future.
Mr Monson highlights reports of rising living costs and increasing labour shortages in China, along with big rises in food prices as government subsidies are being removed, particularly in India. Valuations in these markets are now on the high side, he adds.
“I think that we have got a relatively classic asset price bubble emerging in this recovery, and that you have got one of these windows that last occurred in 95-96-97, in the run-up to the Asia crisis, when you make more money, are subjected to lower volatility, and probably have got greater transparency by investing in the Western blue chips selling into Asia, rather than in the Asian markets themselves.”
Sarasin favours a “nifty fifty” theme in a global equities portfolio, referring to the informal term used to refer to 50 popular large cap stocks on the New York Stock Exchange in the 1960s and 1970s, that were widely regarded as solid growth stocks. But this time the theme would be played out on a global, rather than solely US, scale.
“If you go back to the late 50s and early sixties when the phrase was coined, it wasn’t just the fifty largest companies in America, it was the fifty largest companies with a broadly global distribution base, and a broadly non-cyclical, more growth orientated, business model,” says Mr Monson.
“That is, I think, what you want today, and we would select those funds through our thematic equity investments, and we would recommend a large, fat, global theme fund, which would gain you a lot of the dynamism of the Asia region, but solve the valuation, balance sheet, and interest rate problems which you have in a local market.”
Priya Kodeeswaran, who manages the RWC Advance Absolute Alpha Fund, a global long-short equity absolute return fund launched in February this year, agrees with the theory of focusing on global sectors and companies to take advantage of value shifts across regions. “By having a global approach, we can objectively identify winners and losers on a international basis regardless of domicile,” says Mr Kodeeswaran.
This is especially relevant in those industries and sectors which are truly global from both a competitive point of view as well as end market demand potential. “Again, we follow the value transfer rather than being tied into investing into a specific region,” he adds, acknowledging that following Western companies into Asia is an effective way to generate returns. “For a large amount of Western, developed companies that are smart and can sense the opportunities, they can still make money out of Asia by tilting their business to where the growth is, and those are the companies that I look to play in the US and Europe. It’s not as if it is all going to go one way, that Asia is going to expand and the West will be left for dead, but there are going to be winners and losers, and companies that get it, and those that don’t.”
