The world of emerging markets equities is ever evolving, but the $140 billion UniSuper believes that at least in the foreseeable future, the one big question in the asset class will still be China or India.
Following stimulus measures in September, China’s equity market has seized a lot of capital from the rest of Asia, partially contributing to the Indian market foreign sell-off in October, which was the biggest since early 2020, according to Bloomberg.
But the recent bout of optimism didn’t sway UniSuper, which remains bearish about China’s structural growth prospects. In contrast, the fund is overweight India and has been investing in it for more than a decade. Alongside Japan, India is one of the rare areas where it made country allocation, says UniSuper head of global equities Thomas Tam.
This is partly because the fund always wants to keep a “margin of safety” as it is investing members’ retirement savings, and does its best to avoid a wide dispersion of outcomes, Tam says. UniSuper’s global equities portfolio is approximately $40 billion.
“If you look at the return profile of China, and in past years but particularly this year between mid-September to early October following the stimulus measures, China has rallied 40 per cent, [and] since then it’s dropped 15 per cent,” Tam tells Investment Magazine.
“That is actually a pretty volatile return profile, in my view, compared to India this year.”
In some areas like the urbanisation rate and GDP output, India still needs to catch up with China, but the former has structural momentum including a consumption-driven economy and young population base, Tam says. He points out that India trumps China in 20-year returns, earnings growth and return on equity.
“People go, ‘India is expensive’, but then if you look over history, it has traded at a premium. I mean, that [return over the long term] is the reason why it trades at the premium,” he says.
While UniSuper has been reducing China exposure, Tam says it will take something drastic for the fund to consider removing the allocation completely, as the nation is still a significant part of the index.
China is also trading on 10 times next year’s earnings, which is another reason why Tam says the fund probably wouldn’t consider selling, “because we are seeing the near-term potential of these stimulus potentially putting a floor in its equity market”.
In the long-run, Tam says it will be a positive outcome if China’s series of reforms under the banner of ‘common prosperity’ could lift the nation’s consumption and revitalise the economy. However, during times of transformation there will be “pain periods” which could make certain sectors’ performances more volatile – an outcome UniSuper is trying to avoid.
“For us, I suspect India and China will still be one thing [in emerging markets] we’ll be talking about over the next 10 or 5 years,” Tam says.
“If there are [other] emerging economies in Asia coming through…the liquidity in those emerging markets makes it much more difficult for us to meaningfully invest in it and actually make a difference in terms of returns.”
