Will fortune favour the bold global investor?

“In the Chinese language,” said John F Kennedy in a speech prior to his 1960 US presidential election victory, “the word ‘crisis’ is composed of two characters, one representing danger and the other opportunity.” He was soon tackling potentially critical relations with the Soviet Union, and facing tough choices in Asia and the Middle East.

The regions most troubling for Washington in the Kennedy era broadly mirror today’s concerns.The jostling for position of potential threats to the global economy and US interests from a politically resurgent Russia, economically powerful China and permanently simmering Middle East will likely be amplified in the coming years. These regions perceived to be generating risk are studied by investment houses and banks searching for reward.

Despite questions about the sustainability of its economy, China’s position as the world’s manufacturing engine, surrounded by a supply chain of co-operating countries, is strengthening. 

Writing in his “Chi Time” blog, BNP Paribas Investment Partners’ chief economist Chi Lo dismisses external factors such as US QE having any negative effect. He expects new economy sectors such as IT, telecoms, finance, medical services and tourism to do well.

China ‘A’ shares, which can only be bought by domestic investors, gained nearly 90 per cent over the last year. But that doesn’t mean investors have necessary missed the boat, as liquidity could spill over into Hong Kong listed Chinese equities (‘H’ Shares), offering lower valuations and higher yields. 

Indeed Sarasin & Partners recommends clients hold ETFs exposed to larger Chinese ‘H’ shares, alongside Hong Kong-listed equities. CIO Guy Monson hopes to reap rewards of gradual deregulation of the Chinese financial system, while avoiding individual stock risk that challenges Western investors.

Equity markets of large oil consuming countries, China and India in particular, look particularly attractive, he says, with Saudi Arabia no longer able to dictate prices or supply levels, as Baghdad, Tehran and Moscow all battle to sell more barrels.

Despite falling oil prices, Saudi Arabia itself, cushioned by $780bn (€723bn) of reserves, also has advocates pointing to a greater dispersion of asset prices in the wake of dramatic re-pricing of the dollar and hydrocarbons.

Saudi boasts a $560bn market capitalisation and 30m population, yet has fallen through the investment net, with shares only traded by locals and a handful of foreign funds. Compare this to Russia, a smaller market, but with 50 funds investing.

The recent change of power after the passing of King Abdullah in January, with King Salman taking the helm, could also prove a window of opportunity.

A $25m gift from the new king to his citizens could boost performance of consumer discretionary stocks and private healthcare firms, believes Mark Krombas, a fund manager at the Qatar Insurance Company. 

The expansion of listed stocks in these markets is playing increasingly to the expertise of family offices, which have a long history of engagement with developing economies.

“Some people see China as a black hole, which will suck the regional economy, crush and destroy it. We don’t see that and GDP per capital is still way ahead of the West,” says Ian Barnard, a founding partner of private investment office Capital Generation Partners, preferring broader Asia exposure rather than buying specific Chinese shares.

While Russia is currently the “wild child” of the developing economies, Mr Barnard believes at least part of its reputation has been unfairly acquired. “It is very, very cheap and even if you take the gloomy view on the future of commodity prices, there is value in some Russian stocks.” Yet the “fear factor”, as yet not priced in, means he will not be recommending Moscow stocks to clients. 

Unlike the Cold War era into which President Kennedy emerged, it is becoming ever more difficult to forecast political, and therefore economic, outcomes.