Global emerging markets roundtable


looking for when investing in an emerg- ing markets index?


One area of homogeneity currently is the influence of politics on companies in most emerging countries and the need to understand the ESG risks, around governance.


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Other than that, there is not a huge amount of homogeneity. If you define emerging markets by the overall size of the economy, then you have question marks around China’s inclusion in the index. If it is more around income per capita and the pace of development, then China merits inclusion.


There are other considerations when reflecting on whether China should sit within emerging markets, such as the potential controversy of excluding China but keeping Taiwan, which is 16% of the Emerging Market index.


Excluding China would see income per capita across the index rise significantly. There are big index weightings in Taiwan, Korea and the Middle East, so in exclud- ing China you would move further away from what some people define as an emerging market being a low economic base.


Another important question is who is best placed to have discretion over key asset allocation questions. Currently you are giving emerging markets fund man- agers the discretion to allocate between China and ex-China. You also have to consider who is best placed to have discretion around which stocks to own in China; do you want a China-focused manager, who is based in the country, or a GEM-focused manager who may be more experienced in areas like governance?


There are so many areas to debate, but it is valid to think about this topic, given where we are in China and what it means. Visavadia: Whilst it is a convenient way of classifying risk into buckets, it has no value for investors, frankly. I do not hear a lot of conversation among trustees on the issues we have raised today.


42 | portfolio institutional | May 2022 | issue 113


The world has benefited from the goods and ser- vices China offers, which kept inflation down for years. Going forward that may not be the case.


Dinesh Visavadia, Independent Trustee Services


Inderst: Do you mean a change towards a consumption driven growth model? How could investors benefit from that? Visavadia: It is all about demand for goods and services. There is an internal demand in China and, with the population being so large, they can easily satisfy it. Just like in the US. We can take advantage of that domestic demand.


Everyone sees emerging markets as high risk, difficult to govern and difficult to transition. That is not necessarily true, because there are companies growing fast that we ignore because of this label we put on them. Education is needed for trustees to understand what these companies can contribute to portfolios.


What do you look for when handing discre- tion to an emerging markets manager, Dinesh? Visavadia: I like to see a balance between onshore and offshore Chinese invest- ments, which is not there. Things are opening up slowly, but I am not sure it will happen in half my lifetime. What is more important is that China’s system is different. They have different policy responses. Making issuers in the real estate market personally liable for their decisions is dramatic and does not happen anywhere else.


It is a matter of time until China changes its policy because domestic pressures are increasing quite significantly. If they do not change, there could be social unrest. The world has benefited from the goods and services China offers, which kept inflation down for years. Going forward that may not be the case. That will be a challenge in how we make decisions and is where the uncertainty comes in.


It is inevitable that when there is the like- lihood of unrest in a country, the govern- ment keeps things calm at home. And China has a system of policy decisions that can address it quickly. Inderst: The flipside of that is there has been a significant decline of foreign investment by China since 2017. The mindset of politicians and the media is still that China is going to buy everything, but the foreign direct investment figures show something different.


That could be a reflection of the re-orien- tation of the growth model. Even in the belt and road initiative or their infrastruc- ture projects in Africa, activity has not stopped but it is less than it was five or six years ago. Smith: You have a situation where Chi- nese overseas investment is deficient rela- tive to what it should be given the size of the economy. Then you have a dynamic around the money that has entered China and has multiplied.


The concern is if too much of that capital leaves too quickly it would undermine the piecemeal approach to taking the excesses out of the real estate industry. That flight of capital out of China needs to be con- trolled, so what you are seeing is a reflec- tion of that policy objective. Pickering: In pensions, there are two end users: a trustee and, in DC land, the indi- vidual member. I do not think either a trustee or individual member should get close to these judgement calls. I am happy to determine the levels of risk and volatility when it comes to asset allo- cation, but as a trustee I am more com- fortable with an All World equity or All World bond. I would rather delegate the


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