Despite the intense focus on emerging markets, the sector was “still undercapitalised” as a result of short-term profit taking by global institutions, according to Investec Bank global strategist Dr Michael Power.
Speaking at the Australian Superannuation Investment Conference (ASI) on the Gold Coast last week, Power said that emerging markets’ share of global market capitalisation was likely to move from one third of the total today to around three quarters by 2050.
“By 2050, the BRIC economies of Brazil, Russia, India and China will be four of the top-six economies of the world,” he said.
“The question you have to ask is whether the western developed economies are turning into Japan, with years of stagnant growth.”
Lions and losses
One of the most attractive things about emerging markets, said Power, is that they were “not as debt-rich” as the developed-market economies.
“That is one reason why they are accounting for the lion’s share of global growth,” he said.
Power said that “smart investors” – largely sovereign wealth funds – were currently moving into key emerging markets, which were still well priced as a result of profit taking over the last few years by institutional investors needing to shore up their losses from developed markets.
Morgan C Harting, a senior portfolio manager at AllianceBernstein also addressed the ASI emerging markets session on the theme of reducing risk and said that a combination of debt, equity and currency exposure could – if well implemented – reduce emerging market risk significantly for investors.
In terms of equities’ exposure, he used the example of how investing in a company such as Japanese company Sumitomo Rubber could give investors exposure to the booming Chinese auto industry with little risk.
Although China First Auto and Shanghai Auto are the two dominant companies in that market, investors are limited largely to the restricted A-class shares denominated in renminbi.
Sumitomo Rubber, however, supplies tyres not just to the Chinese industry, but has plants in both Indonesia and Thailand, and is well placed to take advantage of a major economic trend in emerging markets.