Lose the home bias and give emerging markets the exposure they deserve.
This was the warning delivered by Investec Asset Management investment strategist Dr Michael Power, who told delegates at the recent Association of Superannuation Funds of Australia conference many super fund managers had already missed out on the extraordinary growth story coming out of that sector.
“So far this year the S&P/ASX 200 Index has dropped 2.7 per cent, while the MSCI Emerging Market benchmark has risen 12.4 per cent,” Power said.
He put that oversight down to a heavy reliance by superannuation fund managers on locally listed and unlisted assets and a belief that an exposure to commodities also gave adequate exposure to emerging markets.
“Investment in commodities is only part of the growth story. Without direct exposure to emerging market debt and equities, Australian funds will miss out on the bigger global picture.”
However, Russell Investments director of capital markets research Graham Harman said it was an overstatement to say there was huge upside in emerging markets.
This is because the strong growth in emerging markets is a function of the huge growth in imports. With a lot of money being pumped into capital, companies have been able to achieve higher top-line growth, but have diluted their earnings per share.
Harman also disagreed with Power that emerging markets were not too hot to handle.
“The concern is their exceptional good performance of the last 10 years. High single-digit returns will not last forever. It is getting a little hot,” he said.
However, both agreed the distinction between emerging and developed markets was becoming academic.
“It is now inaccurate to call many of them emerging because they have well and truly arrived,” Power said.
“The developed verses emerging markets distinction needs to update to low verses high GDP (gross domestic product) growth.”
