Tubbs, who runs Mirabaud’s global emerging market (GEM) and Asia ex Japan funds, said 2017 saw both portfolios perform well because they were overweight technology – specifically in China and Taiwan.
In 2018, though, “we are still exposed to technology, but we have scaled it back”.
The company believes that the rally in emerging markets will be more widely spread across different sectors this year, which has seen it overweight financials in a number of markets.
Protecting the planet
In addition, Tubbs explained that, currently, the biggest overweight in the portfolio “could be classified as environmental protection”.
China Everbright International, a listed state-owned enterprise (SOE), is one of the largest companies in China that takes waste and converts it into energy and then sells it to the Chinese power grid, Tubbs said.
“There are only a handful of companies that do this, but they are one of the largest. When you consider the pollution problems in China and the huge amount of waste that is produced by 1.3 billion people; including household, industrial, agricultural and hazardous, converting that into electricity is a nice, green form of technology.”
He highlighted the recent announcement that China would no longer be accepting waste from other countries, including the UK, as it focuses on cleaning its own house.
“That nicely illustrates China’s approach to environmental issues and the fact that they are refusing to deal with the UK’s problem and at the same time China’s government is very concerned about their own pollution problems.”
Tubbs said it contrasts starkly with the US and president Donald Trump’s personal take on global warming.
“In a Tweet, Trump wrote, ‘the concept of global warming was created by and for the Chinese to make US manufacturing non-competitive’,” he said.
“That nicely illustrates his mentality that there is no pollution problem and that global warming is a figment of people’s imagination.”
Tubbs strongly believes that, when investing in emerging markets, “you should be investing in line with government policy, as opposed to going against it”.
“The Chinese Government’s policy is firmly routed in trying to improve the environment, which is why one of our biggest positions is in this company.
Political ramifications
Tubbs is not concerned about the potential political involvement in running SOEs.
“I believe the government is very supportive of China Everbright International, so I’m much less concerned with this particular company. If you look at the government’s intentions to improve the environment, the policies and reforms it has pushed through, the 13th five-year plan, everything they have been talking about is to encourage companies like this one to do their part, to clean up the environment.
“My personal view is that there are some good SOEs and some less good ones. Some that are run with the interests of the company or shareholders in mind, and other which are blatantly not.”
The company has a strong balance sheet and good cashflow, Tubbs said. “So, there aren’t red flags with this company – unlike with some SOEs in other areas.”
The Chinese political environment has pros and cons, he said. “President Xi has been successful with the anti-graft policy, which is ultimately positive. It looks like the Chinese constitution could be changing so that there’s no longer a two-term limit on the presidency, which is positive and negative, you could argue.
“It sounds like China has taken a step back, in terms of moving towards democracy. But, on the other hand, from a stock market investors perspective and assuming he continues to push through sensible reforms – that stability is attractive.
“It’s a bit of a double-edged sword,” Tubbs added.
