Emerging market economies have a “bumpy outlook”, said PM Capital's Emerging Asia Fund portfolio manager, Kevin Bertoli.
“Emerging markets are typically dominated by businesses that have a high degree of uncertainty, such as those driven by the macro environment or businesses of lower quality with no long-term sustainable advantage,” said Mr Bertoli.
“Additionally, the recognition by the Chinese banking system of deteriorating asset quality and liquidity tightening could prolong this year’s disappointing results,” he said.
PM Capital believes the risks associated with SOEs could also create problems for a passive investment strategy.
“On top of the widely known issues surrounding transparency, SOEs ultimately act as levers for their majority government shareholders to grow the economy. This often results in management being little more than ‘yes men’ who often make irrational investment decisions for the benefit of the country as a whole, rather than in the interests of shareholders,” Mr Bertoli said.
The specialist fund managers believes that the indexing of the Asian emerging market ETFs do not take into account these risks.
“A large portion of the market is investing solely for broad base thematic reasons, such as the rise of China. These investors will typically buy the market as opposed to diving deeply into the underlying stocks, and this can be seen in the rise of ETF’s in the region over the last decade,” Mr Bertoli said.
PM Capital believes these factors point to the need for active management in the region.
“We cannot stress the importance of investing from the bottom up, based on fundamentals and in genuine businesses where the valuation displays a meaningful dislocation from its share price... with market volatility on the increase, we believe there is ample opportunity for us to deploy our strategy and take advantage of the market mispricing,” Mr Bertoli said.
