“There was a lot of money heading into those regions before the crisis, but now investors have a clearer picture of the future in different regions they’re a lot more comfortable heading back into emerging markets.”
As investors have cottoned on to the fact that the East remains connected to the West, they have also become more lateral in how they approach investing in it.
The popularity of emerging market funds over the past couple of years has prompted many analysts to label the sector fully-valued, or even over-valued, at present. And while opportunities undoubtedly remain buried in stockmarkets from the BRIC economies and beyond, Morningstar’s Douglas says many international fund managers are now telling the research house they see better value in buying the emerging market story through developed country exchanges.
Brenda Reed, London-based portfolio manager of the Fidelity Global Equities Fund, says this reverse strategy makes sense, as huge flows into emerging markets have distorted stock prices. Reed says she is a “big believer in the idea that the economic centre of the world is shifting East” and, in one way or another, her fund has played out that theme over the years.
“However, one thing I keep telling people is that there is a big difference between where a company is domiciled versus what drives the company’s earnings,” she says.
“We can buy emerging markets exposure through buying a company that is domiciled in a developed market. “I have some of those in the portfolio because they’re really cheap.”
According to James, investors in global shares can no longer rely – if they ever could – on labels.
“You’ve got to strip the labels off and see what’s underneath,” he says.
An example of this, James says, is the traditional view that Western banks are sound while emerging market financial institutions are rubbish. The recent banking crisis in the West, which precipitated the broader economic meltdown, has exposed the fallacy of that argument, he says. James says while many US, UK and European banks were leveraging up their balance sheets into dangerous territory, in the East the savings rates have generally been higher and lending more sober.
The outcome has been good old-fashioned banking margins – pay depositers at 5 per cent, lend at 10 per cent.
“To me that’s exactly what a bank should be doing,” James says.
“Compare that to a developed market bank: trading its own proprietary book; it’s making a lot of its income from fees; lending money to people who couldn’t pay it back. That, to me, is riskier.”
Even so, there may be few emerging market banks that meet an investor’s criteria, which is where the global stock-picker’s skill comes into its own, James says.
Like Aberdeen, Reed’s Fidelity global shares fund takes a bottom-up approach to stock-picking. Macro-investment themes, if they exist, appear only after the fact, Reed says.
“I’m just looking for 100 good ideas,” she says, out of the many thousands of listed opportunities.
According to the World Federation of Exchanges website, more than 46,000 companies are currently listed across the 52 bourses on its database. Most international share managers whittle that number down quickly; but there is a generally-accepted universe of about 12,000 to 13,000 companies that might make the first cut.
Researching the entire universe might be impractical, but Reed says Fidelity’s team of 700 or so professionals scattered around the world sift through a fair proportion. And gems can appear in places outside the mainstream, she says. For example, Reed is bullish about Aspen Pharmacare – a pharmaceuticals company listed on the South African exchange.
“Aspen is the largest generic drug company based in South Africa,” she says.
“[Aspen] is looking to improve healthcare in a cost-efficient manner. They’re good at what they do and they’re great at distribution. They’ve just done a deal with [drug giant] GlaxoSmithKline to distribute their products through Africa. “And the stock is still cheap considering its growth rate.”
As emerging markets mature, similar stories are sure to appear out of Africa and other regions currently neglected by Australian investors.
Nigel Wilken-Smith, van Eyk’s head of strategic research, says the group has tried for several years to encourage Australian advisers to broaden their international exposure – particularly to emerging markets and the global small-caps sectors. Wilken-Smith says in van Eyk’s 2007 strategic asset allocation review it recommended advisers shift domestic exposure – which included all asset classes – down to 50 per cent, from the prevailing rates of about 70 per cent.
Interestingly, van Eyk has recently reduced its recommended weighting to international equities, shifting the emphasis to alternatives, although it remains committed to convincing advisers to invest more offshore. However, Wilken-Smith admits the resistance remains strong.
“Australian financial planners have seen returns from traditional international shares that look pretty anaemic,” he says.
“And they’re suspicious of emerging markets because they’re concerned about governance issues, such as lack of transparency or corruption.”
But Wilken-Smith says Australian investors still need exposure to emerging markets, pointing out that governance in the sector has improved markedly over the years. While van Eyk, Morningstar and S&P might all emphasise different aspects of the international investment story – as well as holding competing views on asset allocation and manager selection – they have a broad agreement that Australian advisers should peek out further from their national borders.
Clearly, risks remain in global markets – chiefly, a slow-down in China and brewing sovereign debt problems, of which Greece is the current exemplar. International share managers are also divided on the short-term outlook.
