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 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, portfolios which until recently were weighted 60-40 towards domestic markets, are now being invested up to 90 per cent abroad.”
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 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.
China and Malaysia are the “top picks” of countries in the Asian market according to the quantitative model 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 particularly undervalued when compared to its peer group.
A major, ongoing review of the positioning of emerging versus developed country allocations is currently taking shape at UBS Wealth Management, which runs SFr170bn ($204bn) in Asia, down from its SFr200bn pre-crisis peak.
Themes 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, he has been shifting back to a more bullish view on emerging markets equities. "If developed economies are facing slow-growth (but not double-dip), it could prove beneficial to start putting money back into emerging markets, from currency, to local fixed income and eventually even to equities,” 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. With corrections in commodity prices and lower forecasts for developed country growth, emerging country over-heating issues should get resolved in the near future.”
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.
“But during the last decade, if you have decent liquidity, GDP growth and capital markets which are functioning OK, there is a correlation between growing countries and their companies, even though there are some dislocations over the short-term,” he says.
“If you are a dollar or euro denominated investor, you will benefit from both an earnings and currency perspective. Going forward, we expect higher tactical and strategic allocations to places like Asia.”
Mr Leung singles out Indonesia as a potential home for Asian allocations. “Indonesia has some of the growth attributes of China and India, sharing similar long-term structural benefits, but with less inflation problems,” he says.
