An opportunity too good to miss?

Private banks are increasingly recommending that clients allocate a bigger chunk of their core portfolio holdings to emerging markets. Growing faster than recession-challenged developed markets, the so-called Brics – Brazil, Russia, India and China – as well as other emerging economies, are being hugely hyped by wealth managers. The likes of Merrill Lynch and Credit Suisse are major backers, helping whip up inflows into equity funds. Investment houses with equity products investing in the growth stories of Asia and Latin America are adding their voices to the clamour. In parallel with the long-term investment opportunities, a wealth of structured products are being constructed by investment banks, sold through their private banking sister channels. These play on themes including predicted interest rate increases, short-term market movements and arbitrage within a basket of currencies. But other camps are urging caution, wary of civil strife, overvalued companies and semi-apartheid labour markets in India and China. There is also talk of Russia being dropped from the Bric club and Turkey becoming the new Brazil. Africa, currently seen as a ‘frontier’ market could also become a new member. This lack of homogeneity could make allocations to generic emerging markets at best irrelevant and at worst dangerous. Dissenting voices, including Lombard Odier, are highlighting research from the London Business School, doubting links between GDP growth and share performance. The Geneva-based bank is also pointing to a negative correlation between population growth and stock prices. Lombard Odier’s chief investment officer, Paul Marson, says the current attention being lavished on China is hugely reminiscent of the aura surrounding Japan in the 1970s and 1980s, when that country was expected to be the world’s industrial powerhouse and leader of economic activity for decades to come. Twenty years of sideways moves in Japanese equity market have laid that story to rest, despite a number of false dawns along the way. But then again, the likes of Schroders Private Bank are not slow to create the odd structured product, which can quickly profit from a surge in Tokyo prices, then pull investors out once normality returns. Whether European clients should make large scale core allocations to emerging market equities is still a matter of great debate. Bonds issued by corporates in these countries, particularly Russia, are also an interesting way to potentially profit. Should clients opt for allocations to locally based managers in China, Korea and Indonesia, with daily access to the high growth companies? Or should they follow the route favoured by Swiss banks Sarasin and Lombard Odier, investing in those Western companies with increasing exposure to developing markets, without the balance sheet and currency risks? Either way, the story of the world’s developing nations is too powerful to be ignored.