They never should have gone out of fashion, of course, at least not with big super funds, but with a return to relative normality with their growth trajectories and fully valued equities and bonds in most western countries, the big emerging markets (EM) buyers are back.
According to Kimon Kouryialas, head of Pan Asia business for Martin Currie Investment Management, the December quarter saw a real uptick in interest and allocations from super funds and other institutional investors.
“Most funds are now at [index] weight,” he said. “The question for them is ‘do they hold that weight or increase it? There are several factors to consider and one of them is that quite a few EM managers are at their capacity limits.”
Kouryialas, who has been marketing EM strategies for many years, said that there had been a big pick-up in RFPs from North American funds in the past quarter. There was a lot more interest in EM, for example, than Asia ex-Japan. One reason for this, despite Australia’s growing position in the region, he said was because the rise of China, ironically, mean less diversity – from a country perspective – in the Asia ex-Japan indices.
Andrew Ness, EM portfolio manager at Martin Currie said that emerging markets as an asset class had changed since the 2015 and 2016 downturn. “It still used to be largely cyclical, volatile and concentrated in heavy industry and metals. Now there are genuine world-class leading companies across a range of IT, banking and consumer stocks,” he said.
“We can find good investments in China. They are very serious about cleaning up emissions. And also India is very much like China. The Indian industrial space has lagged the consumer space because the private sector cap-ex has not been strong. Infrastructure spending has relied mostly on government spending. We’re starting to see private sector spending pick up,” he said.
Recent policy changes were reducing corruption and the bureaucracy. “They used to say that the English invented bureaucracy and the Indians perfected it,” Ness said. He pointed to the “demonetization” of the economy last year – reducing the number of businesses which relied on cash and favouring the larger, more efficient businesses with better governance – and the introduction of a GST which requires registration as having a positive impact already.
The large Indian jewelry companies which paid the tax were beneficiaries of the changes, such as the sector leader Titan Industries, which is one of Martin Currie’s stocks.
“But India will always be a case of two steps forward and one step back,” Ness said. “But even if companies can move from a growth rate of 8 per cent to 10 per cent, that is a huge opportunity, especially since our holding periods are quite long. Our average portfolio turnover is around 10 per cent.”
Kouryialas and Ness were joined on the latest EM markets presentations in Australia last week by Paul Desoisa, who joined Martin Currie in 2013 as an associate investment analyst, and now portfolio manager. He tends to concentrate on industrials and utilities.
Martin Currie recently did some work on the gas sector in China and India, and about 12 months ago starting buying into China Gas Holdings, taking an increasingly positive stance, adding to the holding as the price jumped about 100 per cent over the course of the year.
“We have seen gas volumes on the rise but last year they too a real step up,” Desoisa said. “There’s been a re-bound in industrial activity and the Chinese government has introduced a gas-for-coal conversion subsidy for households. The government wants natural gas to rise from 3 per cent of energy consumption to 10 per cent by 2020.
“In northern China there are about 40 million households that the Government has said it wants to convert to natural gas,” he said.
China Gas was one of a number of gas distributors there but had a first-mover advantage.
“We also did some work to see where there might be an international trend, such in India. India, where domestic production has been poor, is more reliant on imported gas than China… In 2000 India consumed roughly the same volume as China but now China consumes four times as much as India.”
Desoisa said that gas was currently too expensive for the power companies but it had become cheaper for vehicles. More domestic gas would be of benefit to the gas distributors.
Greg Bright is publisher of Investor Strategy News (Australia)