Emerging market investments have finally made the long transition from peripheral to core positions in institutional and wealthy private client portfolios, believes Daniel Enskat, head of global consulting at Strategic Insight.
Many bricks in the wall of money chasing the fortunes of developing economies originate in the US, from where investors are witnessing the rise of a global middle class, he says.
“Emerging markets as a core concept is developing round the world,” confirms Mr Enskat. “Even in the US, where until recently, portfolios were weighted 60-40 towards domestic markets, they are now being invested up to 90 per cent outside home markets.”
According to London-based fund house Schroders, a shift in investor perception, upgrading developing economies from a minor tactical to full scale strategic interest, was responsible for record inflows of more than $95bn (€65bn) into emerging markets equity during 2010. But how to benefit from dividends generated by newly developed consumer spending habits and manufacturing advantages in the developing economies remains a tougher question to answer. There is no broad agreement across the wealth management industry, with many groups opting for country specific opportunities and others preferring to concentrate on industry sectors or individual stocks.
China and Malaysia are the “top picks” of countries in the Asian market according to the quantitative model of country comparison overseen by Jonathan Garner, chief strategist for emerging market equities at Morgan Stanley. “Malaysia is re-engaging with the global investment community and the Petronas IPO has proved one of the region’s recent landmark transactions,” says Mr Garner, adding that the Malaysian currency is also particularly undervalued when compared to its peer group.
Indian equities should be the least preferred for private clients, says Mr Garner, with valuations currently 25 per cent more expensive than neighbouring Asian economies and growth slowing faster than elsewhere in the region.
REVIEWING ALLOCATIONS
A major, ongoing review of the positioning of emerging versus developed country allocations is currently taking shape at UBS Wealth Management, which runs SFr170bn (€140bn) in Asia, down from its SFr200bn pre-crisis peak. Yonghao Pu, head wealth management research Asia-Pacific, is recommending overweight positions, backed by the bank’s Research Based Advisory (RBA) process, in US and German stocks, alongside similarly bold calls on China and Korea, with a downgrade to neutral for Russian shares.
Among the key emerging markets themes being selected by the RBA team for satellite investments alongside core allocations, are agriculture, Asian consumption and the globalisation of Asian companies.
“At the end of last year, we thought it might make sense to pull some money out of emerging market equity into developed markets, as valuations climbed in the midst of the tightening cycle,” reflects Ivan Leung, chief investment strategist at JP Morgan Private Bank in Hong Kong.
But since then, markets including China, Russia and India have lost between 5 and 10 per cent, despite a lack of accompanying adverse newsflow. He is therefore reversing the decision and going back to a bullish view on emerging markets equities.
“If developed economies start to slow down, it could prove beneficial to start putting money back into emerging markets, particularly on the equity side,” says a cautiously optimistic Mr Leung. “The Chinese authorities have been very creative in damping down inflation, having used a mixture of price controls and interest hikes as part of their managed economy.”
The “big debate” for asset allocation specialists is whether portfolios should be identical, regardless of whether a client is based in the US, Europe or Asia. “Most clients in Asia prefer to have something more GDP weighted,” says Mr Leung.
“This reflects what you actually see in the world, and you can divide market allocations approximately one third in each of the US, Europe and Asia, if you believe in the ascendancy of China, India and other emerging markets.” Asian currencies are also historically undervalued, he argues, pointing to the Chinese RMB in particular, but also encompassing markets such as Singapore, Korea and Taiwan, whose cheap currencies help to boost those nations’ exports.
Currency debate has always been too focused on the US dollar, rather than a more relevant discussion to investors about what is going on in the East, claims Mr Leung, with a belief in structural appreciation of Asian currencies acting as a persuasive argument for investors. “Emerging market currencies are definitely cheap and they can add value with high productivity,” he argues.
ACCESSING GROWTH
There remains a significant body of investors, however, many of them outside Asia, who believe you cannot invest in a country’s GDP and that equity markets do not give you direct access to any growth, says Mr Leung. He gives the particular example of China, where companies’ performances are much more linked to government policy than to economic indicators.
