The growth rates of emerging markets are becoming increasingly attractive for investors, said Karma Wilson, head of Asian equities for AMP Capital Investors. But the decision as to whether to overweight Asian investments tends to be more difficult for Australian investors than those from other western countries. As well as assessing the overall market risks of Asia, and currencies, Australian investors with just an average allocation to mining and materials are probably unsure of their real reliance on Asian growth. Chances are, though, it is more than they think. How much of their BHP shares, for instance, should be considered as being dependant on Asian growth? According to Wilson, Australian funds need to look within a holistic risk framework to fully assess “correlation risk” in their Asian exposures. To do this, they can:
1. use scenario testing, such as looking at the common drivers in the portfolio that may correlate in an Asian growth slowdown, 2. look at the fund’s overall beta to China or Asia, 3. apply common sense to the upper asset allocation band allowable for Asia, 4. consider the make-up of the fund’s Australian exposure, particularly to resources, 5. take into account the commodity exposure of the fund, 6. weigh up the foreign exchange position of all international exposures, not just the Asian portfolio, and 7. consider the ability of the fund to sustain short-term volatility. …and take a look at infrastructure She suggested investors could also look outside the broad markets and at infrastructure, property and private equity for access into Asia. Infrastructure is considered a cornerstone program for both the Chinese and Indian governments’ efforts to maintain their countries’ high economic growth rates. The demand/supply gap also meant that quality infrastructure investments were available at good valuations.
John McCarthy, managing director and head of RREEF Infrastructure in London, agreed that Europe and Australasia represented better infrastructure opportunities than North America. McCarthy said most international infrastructure managers focused on one or two regions because the deals usually required a lot of local knowledge. He estimated the total Asia- Pacific infrastructure market to be worth US$15.8 trillion, compared with US$13 trillion in the US and US$9.1 trillion in Europe. Asia-Pacific tended to offer higher reward commensurate for higher risk, he said, and country-specific factors were more important for investors to consider than elsewhere. Regulations were not always well defined. McCarthy said that following the credit crunch, which left many casualties among infrastructure managers, specialist funds had been restructured to benefit investors, including lower and better-aligned fee structures.
