Generally speaking, traditional developed markets aren’t really doing it for the Brown Shipley team at the moment. Despite maintaining a slight 5% overweight to equity assets, they are underweight US and just broadly neutral on the eurozone. This blasé outlook extends to the UK where the team remains cautious about their exposure to domestic stocks, instead leaning toward international large cap companies.
“The UK economy will do OK in an environment where the global economy is reasonably strong, but we see scope for higher returns elsewhere,” he says.
Smith is slightly cheerier about sterling’s prospects over the long-term, though he himself concedes that depends entirely on whether the UK is able to make any significant progress with the EU on an exit strategy, which “we’re just not seeing any evidence of that as yet.”
“I wouldn’t say we’re pessimistic,” he says on the haphazard Brexit negotiations. “I would say we’re hopeful.”
By contrast, emerging markets, particularly in Asia, look far more appealing to the Brown Shipley team in the risk-friendly global environment. Smith began shifting more money into emerging markets in August 2016, strategically selecting diversified exposure through a host of third party funds, like the £774m Baillie Gifford Emerging Markets fund, co-managed by Richard Sneller and Mike Gush.
One of the sectors he thinks is benefiting the most and contributing to this synchronised growth is tech. The digital revolution has proven to be one of the great equalisers, connecting consumers and producers and suppliers from opposite corners of the globe, as well as providing growing markets with the impetus for innovation. Information technology stocks make up 28.5% of the MSCI Emerging Markets Index, the largest weighting of any other sector.
Smith extended his weighting in global tech back in January at a time when the sector’s prospects were bleak as then president-elect Donald Trump prepared to assume the role of commander in chief.
But, of course, value did not triumph over growth in the end and supposedly doomed areas under Trump like tech have prospered with the Fang stocks hitting record highs. One of Brown Shipley’s tech investments, The Polar Capital Global Technology fund, has seen tremendous growth year-to-date, yielding total returns circa 40%.
Next stop China
When it comes to Smith’s high conviction in tech and emerging and developed Asia, all roads lead to China.
“We look for very diversified exposure in emerging markets,” Smith explains, “but sometimes it is so interconnected. For example, we had a view on developed Asia and emerging Asia based on the strength of China. We saw the initial returns form this position were driven by South America and Brazil and some of that was related to what we were seeing happening in commodity prices, which were also being driven by the China growth story.”
The US may be leading the world in tech but much to president Trump’s chagrin, its arch nemesis China is catching up, boasting e-commerce giant Alibaba and the social media and gaming site Tencent, the first Chinese company to cross the $500bn valuation threshold, pushing its value above Facebook’s.
However, looking ahead to 2018, Smith is concerned that a slowdown in China could lead to pandemonium.
“China drives one third of global growth and has a huge influence on risk appetite. It is a supersized economy growing at super-normal rates of growth and that situation can’t be expected to continue. But I think what we can expect to see is a slowdown in China that doesn’t act to undermine optimism that investors should have for investing in developing markets.”
Italy issues
One of the reasons Brown Shipley’s asset allocation team is not as positive on Europe as other investors is because of the uncertainty around the upcoming Italian elections due to be held in May 2018.
Amid the noise around Brexit, the Spanish government rejecting Catalonia’s bid for independence and talks of another German election, Italy has understandably flown under the radar.
“Irrespective of the fact investors’ concerns about the Italian election have receded somewhat, we think it is very important to be focused closely on what is going on there. The potential to disrupt the eurozone is simply enormous.”
The fate of the Italian banking system also hangs in the balance, which is not something to shrug off, Smith emphasises.
“The pace of reform appears to have picked up in Italy and that’s very encouraging. If we see more evidence that the Italian economy is beginning to recover significantly in the banking sector in particular, that makes the eurozone a much more investable place.”
