by Susan Edmunds
K2 Asset Management’s Nick Griffin said he had been asked regularly over recent months whether he thought it was time to wade back into emerging markets.
Emerging markets have underperformed developed markets in recent times, leading to queries about whether they now offer value.
He said K2’s observation was that emerging markets were just giving back some of the considerable outperformance they achieved in the 2000s.
Although they were getting closer to the bottom of the market, K2 had not seen enough to change its view on emerging markets as an asset class.
“Ultimately as interest rates globally begin to normalise, excess liquidity levels will shrink. This will slow the tailwinds in developed markets but in emerging markets capital is likely to exit due to their higher risk nature. This has been, and is likely to remain, an economic and investment headwind for developing economies over the medium term.”
But he said there were big opportunities in emerging markets if investors knew where to look.
“Our current macro thinking suggests it is too early to re-enter emerging markets as an asset class. However, this view does not mean we don’t see many opportunities for developed and developing world corporates from the emerging middle class and within that we highlight the potential large opportunity that Chinese consumers represent for global corporates going forward.”
He said K2 wanted to point out the huge potential that the rise of the Chinese consumer represented. “Anyone can tell you that the Chinese consumer is going to be a powerful force over the next 10 years.”
While investors would want to get behind that in some way, he said that did not necessarily mean investing in Chinese retail and telecommunications directly.
Companies such as Prada and Louis Vuitton have more than 50% of sales going to Chinese consumers, although they are not headquartered there. “There are big tailwinds for these companies, they’ll benefit in a major way. Where the company is listed is not that relevant. What the asset class is is not the best way to look at it. Here’s a big opportunity – who is going to benefit in the long run?”
Other companies that would benefit from the rise of the Chinese consumer were those in gaming, aerospace, transportation, airport investments, and other luxury goods. “Where they are listed these days is irrelevant. When people ask do we want to be in emerging or developed markets, the answer is developed. But we want to invest in emerging consumers every day of the week.”
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