Buy side backs developed markets
Nov 10, 2009
Developed equity markets still attractive in face of strong emerging market performance, say buy-side panellists
Members of the buy side gathered today to discuss the changing nature of their industry at a breakfast briefing hosted by the UK’s IR Society. They were asked if IROs in the UK and other developed markets face a shrinking pool of liquidity as a result of competition from high-growth emerging markets. (According to Credit Suisse, emerging markets have snapped up around 50 percent of global equity inflows since April.) Here are their responses:
Matthew Hall, vice president, corporate broking, Credit Suisse
‘If you have a good equity story with a strong track record of delivery the pool of money is still sizeable in the UK market. Look at Schroders this morning, they’re having huge inflows into their funds. There is still money. Fund managers have had a really rough year and a half, so these guys are going to be slightly more reflective about what they invest in and their decisions.’
Ben Ritchie, senior investment manager, Aberdeen Asset Management
‘Sometimes, if my colleagues in the emerging markets team are feeling particularly vindictive, they’ll ask me why does anyone bother to invest in UK equities? I have to sit and think for a bit. But I think the real answer to that is that in the UK there are fantastic mid and small-cap companies.
A rising tide will carry all boats up. And people forget about some of the risks that come with the emerging market investments that they will make. There are certainly higher levels of underlying economic growth but that has probably been the case for the last 100 years, not just emerged over the last 36 months. When you have solid cash generation, good IP and strong levels of corporate governance, I think for investors globally that can be a very attractive mix.’
Mark Freeman, senior investment consultant, Hymans Robertson LLP
‘As pension schemes become more and more in deficit, they’ve got to think of ideas to make up that shortfall and, typically, the sponsor isn’t able to make up the shortfall in terms of contributions, so the trustees have to take on some level of risk, and part of that will be to look at active management. Undoubtedly, there will be a shift to more inefficient markets where you’d expect a higher growth rate.’
Alasdair Macdonald, senior investment consultant, Watson Wyatt
‘A lot of people would observe that emerging markets are likely to grow faster than developed ones. To then say I should sell all my developed market equities and just buy emerging market equities is the classic investment response but not necessarily the most considered one.
Economic growth and equity returns are not really that correlated at all. And it’s quite plausible that a lot of the benefits of emerging growth go to western multinationals. Emerging markets are going to have to invest massively in power generation. Do you want to invest in local companies, or do you want to buy Siemens, Alstom and General Electric? They have to buy their turbines and power stations from those three, not anyone locally.
And for sovereign wealth funds, the argument is almost turned around. Yes growth might be faster in emerging markets, but good diversification comes from buying western assets. If emerging markets do great and the sovereign wealth fund invests in emerging markets, that’s fine. But if emerging markets do badly, which is the one time you want to start selling your assets in your sovereign wealth fund to bail out the local economy, the last thing you want is to have those assets invested in emerging market equity. So there are people out there who see buying western assets as quite attractive irrespective of price and growth outlook.’
By Tim Human