With growth rates falling over the world and the balance of economic power shifting away from developed countries, how are investors going to capture growth – while reducing risk? We recently spoke to the head of global emerging markets and Asia-Pacific equities at UBS Asset Management, Geoffrey Wong, about this complex topic.
You’re obviously very experienced in emerging markets, but many investors traditionally view these regions with a certain amount of suspicion, given the potential risk involved. Is this warranted?
We can actually show that emerging markets have diversification benefits. And in the very long-term, these portfolios can provide diversification even at up to 20% of the overall portfolio.
And this leads to reduced overall equity risk?
Whether you’re talking about adding to or replacing existing global equity allocations, EM tends to reduce risk. If you take a more macro perspective and look at where the growth is coming from, you’re seeing birth rates falling everywhere except EM. So over the next few years, more than 60% of growth is going to come from there – 29.5% of which from China and just over 30% from the rest of EM.
Much of the conversations around EM tend to focus on China, but are there other markets people should be thinking about?
Well, India’s always been there – one place where there’s a good demographic profile, good catch-up potential and it should be producing plus-6% GDP growth over time. You’ve also got Southeast Asia, which is rapidly becoming more industrialised – and, in fact, in this era of protectionism you’re seeing manufacturing being exported to Vietnam and Thailand and so on as China’s wages have been rising.
How about outside Asia?
In regions like Latin America, Russia and so on, we’re talking about truly emerging economies. There are inefficiencies there, and if you are able to identify companies that know how to operate in those environments, you can get very interesting returns.
One thing a lot of experts talk about is how you have big, recognisable names listed on EM indices – think something like Samsung – but they’re still trading at attractive valuations, despite their international footprint. Why is this?
There are two reasons. First, there’s the temporary cyclical concern of over-capacity. We don’t feel this is a long-run problem. It’s just the nature of the memory industry, where it’s all about economies of scale. With a new fabrication line, that’s a big investment and then the factory sits there but then demand will keep growing and eventually pricing comes back again.
And on the demand side, you’ve got big data and cloud computing, which leads to a growing demand for memory, but it’s under the control of three players. This means it comes on in chunks, which leads to cyclicality in the pricing, but the underlying long-term demand/supply characteristics are favourable.
The other key reason you get these good valuations is that, at least in Samsung’s case, it’s a huge fish in a medium-sized pond. If you’re a Korean domestic investor, you’re not going to put 25% of your portfolio into one stock, so global investors have to carry the rest of the market cap, which gives you a chance to buy cheap.
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