“Nobody likes their index but ours is getting less meaningful,” says Kim Catechis, the head of global emerging markets for Martin Currie Investment Management. The common indices are no longer “fit for purpose” and they are about to be swamped by the inclusion of China, no matter how gradual the process.
Catechis and co-manager Andrew Ness, both based in Edinburgh, were in Australia with Pan Asia business head, Kimon Kouryialas, last week to talk with funds about their EM exposures and assuage concerns about the outflows from most markets and poor recent returns.
MSCI announced this year that it would look at including China ‘A’ shares in the EM index from next year, subject to liquidity and free-float requirements and then only in stages. If the whole Chinese market was included it would amount to about 45 per cent of the index, Catechis said, which would make the index as a measurement or risk management tool very doubtful.
The MSCI indices are often criticised for not being fully transparent in the way the decisions about inclusion and weights are made. The recent discussion about the possibility to downgrade Peru from ‘emerging’ to ‘frontier’ was an example which surprised many managers.
Over the long term there is a big benefit from investing in countries where a big proportion of the population is coming out of poverty and the middle class is expanding.
“When Nelson Mandella became leader in South Africa there were about four million middle class out of a total population of 44 million,” Catechis said. “Today it’s 16 million out of about 47-48 million. In China and Brazil too, there are millions of new consumers.”
Martin Currie believes that the EM index does not currently reflect the real opportunity set for a well-balanced portfolio with long-term growth potential.
“Emerging markets are not very popular at the moment,” Ness said, “but we’re talking to people to restate the benefits of the asset class and its long-term growth potentials and return expectations.”
“What investors should try to do is match their investment horizon with their liability horizon,” Catechis said. He cited the example of a big pension fund which had put the remuneration structures of its internal investment staff on a seven-year bonus scheme as a better alignment of interests.
Martin Currie, through its disciplined fundamental process, aims to pick the best quality companies in the universe irrespective of their country or sector, or position in the index.
They are looking at the consumer in a different way as the demographics evolve in EM. They are keen, for instance, on insurance stocks in China as the rise of the consumer in emerging markets generally offers structural growth opportunities across many sectors.
The consumer supply market has changed though, with “brutal” competition, wafer thin margins and very little pricing power. The lines are now blurring between traditional consumer stocks and what used to be known as technology stocks.
Martin Currie believes that much of the ‘hot money’ has left emerging markets but fundamentals remain strong. Profitability has nearly bottomed, currencies have stabilized and valuations have improved. The outlook for quantitative easing remains uncertain, and likely to cause more turbulence. Our investment process is designed to drive us to find the best relative investment cases in any market conditions. The broad outlook for the asset class may appear challenging, but we are continuing to find high-quality companies with robust business models that are well placed for the years ahead.
Martin Currie Australia (formerly Legg Mason Australian Equities) has recently lifted its sales, marketing and client servicing with the appointment of two new people: Carly Bode, who joined as marketing manager, and Phil Richter as client services and sales support. Both are based in Melbourne, alongside the investment team. Bode was previously with AllianceBernstein and Richter with Perennial Investment Partners.
* Greg Bright is publisher of Investor Strategy News (Australia)
