Global emerging markets roundtable
nents of the supply chain feeding into China’s fixed asset investment cycle. We have seen consolidation in lots of indus- tries. The iron ore industry is a good example.
The question is whether this moderation of the excesses in China is achieved piece- meal or abruptly. Georg Inderst: Technology is also suffering from political interventions. We might see more global repercussions in technol- ogy stocks than real estate.
The big US technology companies, which are a good proportion of the S&P500, have suffered a setback due, in part, to inflation, interest rates and valuation con- cerns. But the Chinese authorities reining in such companies to stop their owners or managers from getting too powerful also has an effect. Treich: This creates opportunities in other segments of the economy. China is mas- sive and if you look beyond the main indi- ces, into A Shares, for example, there are opportunities coming through in health- care, industrial automation, consumer spending and environmental services which are exciting, but not as easy to access.
On real estate, one of our multi-asset managers has seen a fallout linked to the crisis in China’s property sector, which means there is value in Asia’s debt mar- kets, if you are good at credit selection. That is another offshoot opportunity in an environment where yields are challenging. Pickering: One must not get too hung up about China and India, there are other parts of Asia and other parts of the world. Kate Mead: A lot of our managers feel that the other emerging markets have been overshadowed by the meaningful alloca- tion to China within benchmarks. We have clients enquiring about GEM ex- China as well as China allocations to bet- ter manage that exposure rather than being constrained by an index that dedi- cates what weight they should have and where. There is an opportunity set out-
Instead of talking about emerging markets and developed markets, per- haps we should think more about the diversifi- cation of the drivers of performance.
Rob Treich, London CIV
better defined on a global scale as lower growth rate or economies.
higher growth
rate
side of China that is valued by our clients and managers.
What countries and industries are they interested in? Mead: There is a perception that India has been overshadowed by China. It did quite well last year, so that could reverse some of the flows and overweighting we have seen. Some of the more cyclical opportunities outside of China can potentially be found in Africa and the Middle East. Amandeep Shihn: On the question of whether China should be separated from other emerging markets, it is seen by some as a market in between the broader emerging market universe and developed markets. China, like India and Brazil, is an
emerging market using standard
index-inclusion guidelines as a barome- ter, i.e., GDP per capita. This definition creates a debate on whether South Korea and Taiwan are emerging markets, while large index providers take different stanc- es on South Korea. But emerging markets is an unfair defini- tion for this group of countries. It assumes each country is moving to some shinier new place and that they are a collection of similar markets. Rather than developed, emerging and frontier, they are perhaps
How are your clients accessing China? Shihn: For the large part, the MSCI Emerg- ing Markets index’s China exposure is driven by the offshore market, so inves- tors are under-exposed to China’s onshore economy. We have allocated more to dedicated onshore China managers who sit along- side broader GEM managers in client portfolios, but we have not split China out of emerging markets because by defini- tion it is an emerging market. Inderst: Emerging markets is a wide and loose term. The wake-up moment was when China entered the indices in a big- ger way. In the old days, you had to go indirectly through Hong Kong or Singa- pore
other countries. Suddenly, it comes to market with a 30% weighting in an emerging market index. In bonds it is worse.
or
Then the question arises: do you want to invest in Chinese debt? And what are we really buying? Gill: I am in favour of All World indices for equity benchmarks, particularly if there is an active component so managers can allocate with more discretion. It is also about exposure to the economy rather than exposure to where companies are listed. You can get good emerging market exposure through developed mar- ket companies. All World is ideal but there is an argu- ment for having an ex-China index, par- ticularly if trustees have concerns over governance in China. Mead: A lot of emerging market managers are underweight China. It makes up 40% of the EM benchmark, but managers are often uncomfortable with having such a chunky allocation. Ex-China allows them to manage their exposures better. Concerns over ESG is another rational for some of our clients’ excluding China. Smith: What is the homogeneity you are
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