One of the most frequent assertions by fund managers across the UK investment press over the last year has been that, while the domestic economy may be set for anaemic growth, UK companies are set to fare a lot better.
This is partly down to strong management, who have created lean and well-run companies, but is also because so many firms derive significant portions of their earnings from emerging market economies.
This global diversification has been the saviour of many UK companies, who would have suffered if they had been forced to rely purely on domestic demand for their goods and services. It has also been a godsend for those who rely on their dividends. But the question needs to be asked: how many of those investors who benefitted from this diversification did so by default?
The wisdom of diversification, as expressed and enjoyed by so many corporates, has not yet been truly embraced by many investors. A simple count of the tables at the back of this magazine shows there are over 400 UK equity funds and only around 40 global emerging market funds available to UK investors.
No wonder the diversification card has been played so often by UK equity funds. Investors may be getting international diversification, but it is debatable whether in many cases this is an active asset allocation decision. Surely if it were, these portfolios, while holding FTSE companies, would also hold stocks from a myriad of other global indices too.
Nobody who reads this paper needs a lecture on the opportunities available in emerging markets. But there is one statistic that is well worth reiterating.
Simply put, the gap between GDP at purchasing power parity between advanced and emerging economies is narrowing fast, if indeed it has not in fact already hit parity. The fact is, the so-called emerging economies are likely to overtake their more mature rivals in the very near future.
Yet most investors remain chronically underweight in these key markets, worried about risk and volatility. This is ironic when both of these can be found in abundance without ever having to move a penny from a developed market.
As J.P. Morgan’s Jasper Berens points out on page 31 of this issue: “Regardless of what global growth is doing, people are spending money.
The question is working out where they are spending it.”
The chances are you will not find tomorrow’s spenders in your own back yard.
