As China’s slowdown dominates the macro picture, so professional investors might fret about their underlying exposure to emerging markets. But with the world’s largest companies all fixated on participating in global, not domestic, economic growth it’s impossible to insulate yourself from problems in the East.
Similarly, with the big investment themes, from commodities to consumption, all linked to the emerging world, you’re left with very little choice of assets if you want to go ultra defensive.
The truth is as long as you are invested in risk assets – whatever their domicile – you are along for the ride with the so-called growth markets, whether they actually grow or not.
“One of the things we are trying to get to grips with in our internal portfolio analysis is that underlying exposure, but it is very labour intensive,” says Andrew Bell, chief executive at Witan.
“At times it is like nailing jelly to a wall because you might have a company which, say, has large amounts of sales to a subsidiary in Switzerland, which then relays them on to emerging markets.”
Global picture
A current trend among UK stockpickers may be to skew their portfolios towards domestically-focused companies though that does not negate the fact that the FTSE remains extraordinarily internationally-focused, especially since the demise of the banks.
“If you want to play a UK domestic theme, you have to go into mid and small-cap straight off which means a fund manager will get weird distortions that means they look like a small or mid-cap manager, which pumps up the risk in terms of liquidity,” says Jeremy Lang, of Ardevora Asset Management’s UK Income, UK Equity and Global Equity funds.
In his global fund, Lang says he has struggled with China because, while it looks an interesting investment story, the way to access the market directly is “horrifically scary”.
He opines: “If you go to Chinese-quoted stocks or those quoted in Hong Kong or Singapore, the accounts are really ugly. There are very complicated holding company structures, where they have joint venture partners in China where they bury the assets. As a shareholder, you can’t reach in and grab them; you can’t see what is going on.”
Cloudy picture
The conclusion then might be that investing directly into China and other BRICs can be an incredibly risky and volatile route to market – hence why investors still largely avoid single-country funds in these territories. But then if you do take the developed-market mega-cap route, chances are things are going to be even cloudier.
It’s a tough call, but there are ways to make emerging markets work for you and let you sleep well at night, and this topic will be explored in more detail in the October edition of Portfolio Adviser, out soon.
