This week’s Conjecture panel debate the quick run-up experienced recently in emerging markets and the themes they will be following
Emerging markets regularly top the polls when investors are asked where they see the best performing asset class for 2010.
The panel comprised Daniel Tubbs, co-manager of the BlackRock Emerging Markets fund, Julian Thompson, head of global emerging markets at Threadneedle, and Roberto Demartini, associate director of fund research and sector specialist for emerging markets at Standard & Poor’s.
The World Bank has warned of a bubble in China, do you agree? Do you think it is a more difficult market than others to engage in?
Roberto Demartini (RD): The view of managers based in China is that the first half of the year should still see some positive news coming through. The worry is more for the second half of 2010. Is the money from the West going to be enough to support a potential slowdown from China?
If you look at the long-term trends for China and the lack of population growth, it is a worry compared to the likes of India or Brazil. But there is still some optimism on investing in China.
Is there a currency risk in the coming year?
Julian Thompson (JT): The Chinese government has got less excuse this year to avoid revaluing its currency against the dollar. It may be in China’s best interests to do that, if we start to see inflation creeping up and growth overheating. Revaluing the currency is an obvious way to take some of the growth out of the economy without causing too much pain by having to raise interest rates very aggressively.
The chances we could see revaluation of the renminbi are quite high this year. The biggest impact would probably be on commodity prices because the Chinese are the main buyers of commodities. If their currency appreciates and it becomes cheaper for them to buy commodities in dollars, then dollar prices of commodities would move up. That might have an impact on inflation elsewhere.
UK investors would probably want to have emerging market assets in general and Asian currencies would probably follow the renminbi higher. That would probably be good for most emerging currencies as well.
Daniel Tubbs (DT): The renminbi will appreciate versus the US dollar, but not by very much. Our views are pretty much in line with the market. If you look at the non-deliverable forwards, they are pricing in a renminbi appreciation of around 3%.
I agree the Chinese government has less excuse this year. What held them back last year was the fact their exports were quite weak year over the year, this is not the case any more. They do not have that excuse.From that perspective we think the currency will appreciate.
Is there any reason why you would not recommend emerging markets to clients?
JT: In the long term, we are still extremely positive about emerging markets, we think the demand for growth assets out of the developed world can only grow, especially with ageing populations and pension funds needing to generate higher returns. There are not going to be too many options other than putting more capital into emerging markets. We are nowhere near bubble conditions.
The concern is Greek debt spreads in the short term and the turmoil we are seeing in the developed world bond markets, and what impact that may have on risk appetite in the short term.
Investors are going to have to get used to the fact emerging market debt is in some ways less risky than the peripheral debt of the developed world economies like Greece for instance.
We see this as a buying opportunity but timing entry is always difficult. I am putting more money in at this point.
What about industry trends?
RD: One interesting trend which has characterised emerging markets portfolios is the number of stocks. If you looked at global emerging markets portfolios 10 or 15 years ago, the average portfolio would have probably been more diversified: 100-plus stocks. We have seen, especially in the last three to five years, more and more funds being launched with a bit more of a retail mindset and a lower number of stocks. So in a way more aggressively managed funds, such as Bric funds, are an example of this.
Furthermore, talking to fund managers, it appears as if the links between the various emerging markets are much stronger. This is at a macro-economic level in terms of trades between emerging markets.
Is this the fall of the US empire and the rise of the Chinese?
DT: I think global emerging markets and places like China are growing in importance with every passing day. You can scarcely open a newspaper nowadays without reading an article talking about it. If you look at the financial crisis, global emerging markets and China have been really very resilient. They have, if anything, offered a shelter during this difficult period. And I think they are now in a much stronger position than the developed world. So, yes, power will be transferred.
One measure is if you look at the levels of debt. Levels in global emerging markets are much lower than those in the developed world.
