Allocating across the great divide
Allocations to developing markets may be on the rise but the Western world still has its supporters
As the debate about relative positioning of emerging and developed markets continues to polarise the investment community, we are witnessing several major platforms and private banks tentatively upgrading allocations to developing economies.
Among this vanguard is Société Générale’s flourishing hedge funds unit, Lyxor Asset Management, which oversees 110 managed accounts involving 40,000 market positions. Lyxor has “reversed” its underweight position, believing company valuations in the world’s growth engines of Asia and Latin America, poised to outperform, are proving more attractive than mainstream European and US counterparts.
JP Morgan Private Bank in Asia has similarly upgraded its positions in the region’s economies, although HSBC is keen to diversify clients’ portfolios away from Asia, with some European and US exposure.
And these variations in approach show the nature of the challenge. Western markets should by no means be forgotten, despite claims from some quarters that these are “yesterday’s economies”.
Strategists at another French bank, BNP Paribas, believe many investors focusing on Europe from an equity perspective are obsessed with what is going on in the periphery and the stability of the euro. Their views of the continent are coloured by Greek riots and Spanish unemployment, with this negativity leading to unrealistically low allocations to European economies.
The Nordics are easily forgotten, believes Michael Gordon, CIO for European equities at BNP Paribas Investment Partners. These Scandinavian countries are rich in commodities, backed by independent currencies and high savings, he says. Similarly, the UK has “taken action in an Anglo-Saxon way” to address economic deficiencies.
The feedback from BNP Paribas is that excessive attention paid to the PIGS (Portugal, Ireland, Greece and Spain) in the short-term, detracts from opportunities of investing in well-managed large cap companies in Germany and elsewhere in Northern Europe.
In the valuation sense, there may also be a case to be made for long-term investing in traditional banks, such as HSBC, Santander and even BNP Paribas itself. They are well capitalised, have a geographical spread of business and do not have as much high-risk exposure to investment banking as some of their rivals. As a bank, BNP Paribas has €5bn exposure to Greek sovereign debt.
Sure, Mr Gordon sees the persuasive arguments in favour of having the majority of assets exposed to developing markets. But he is not yet ready to take that step in terms of adjusting allocations for the bank’s clients. For BNP Paribas at least, developed markets still remain firmly at the core of portfolios.
Some major players even believe that the split between developed and emerging markets is an artificial one, with the most significant decision to be made being whether the client believes in taking long-term equity investment positions linked to wealth creation.
Despite some current structural difficulties in the global economy, “equities will remain the asset of the future”, says Lim Say-Boon, chief investment officer at Singaporean bank DBS.
“At the end of the day, equities are simply leveraged off the ‘wealth of nations’. As economies become more productive, as people become cleverer and the factories of Asia produce more, better and more creative gizmos, people who own the factories will create more money, earnings per share will go up and stock prices will inevitably follow.”
