Despite the interesting potential that emerging markets have, investment in these markets involves a risk that is higher than in developed economies: it should only be considered by investors who have sufficient knowledge of financial markets and who are willing to take more risks.
Global emerging equities
Investors cannot afford to ignore emerging markets. Even though emerging economies have seen their growth slow in recent years, their long-term growth potential is still well ahead of the developed world.
Moreover, emerging markets’ share of global stock market capitalisation has more than doubled to over 20% in the past decade, reflecting a broadening and deepening of the investment universe. This is set to continue, with the addition of new countries such as Vietnam and Saudi Arabia, and new market segments such as Chinese A-shares, to major indices.
Our global emerging equities strategy provides our investors with access to the best opportunities the entire emerging equity universe has to offer. As country risk is the main source of risk in emerging markets, we allocate much less to large countries than the major indices, resulting in a better risk spread. We use quantitative screens to flag up attractive stocks, and make full use of our experts across the emerging world for their views on potential holdings.
- Emerging economies still have higher long-term growth potential than developed markets.
- Slower economic growth has led governments to enact business-friendly reforms.
- The global emerging equity universe has increased substantially in both depth and breadth in recent years.
- Global emerging equities are trading at a record discount to developed equities, even though company margins are improving.
- There is considerable scope for talented active managers to outperform the broader universe. An allocation could have major diversification benefits for a balanced portfolio: the correlation between emerging and developed markets has fallen substantially in recent years.
Our global emerging equities strategy is managed out of London by a team of three portfolio managers with an average of sixteen years of experience in the emerging equity space. They are backed up by the considerable emerging equity and fixed-income expertise right across the UBP network, as well as by our developed equity and economic research teams.
- A truly global approach, with a much more balanced country allocation than the benchmark in order to reduce country risk.
- A proprietary quantitative screen to identify attractive stocks from among the 1000-strong emerging equity universe.
- In-depth fundamental analysis of each potential holding with the aim of identifying potential risk factors.
- Standard global emerging equity benchmarks are inefficient, allocating too much to the largest countries.
- An approach involving a more equal country weighting can improve return potential while reducing country-specific risk.
- Quantitative screening is vital in order to identify attractive stocks in a universe of 1000 emerging stocks across 23 countries.
- A qualitative assessment of the risks involved in all potential holdings is equally important.
Our investment process consists of three steps: top-down allocation, stock selection, and portfolio construction and risk control.
Basing country allocation purely on stock market capitalisation is inefficient, so our model reduces the weight of larger countries such as China relative to the index, which in turn minimises country-specific risk and enables smaller countries to contribute more to the fund’s overall return.
Our quantitative model then ranks all stocks in the index according to their individual values and qualities before sending the list of potential holdings to our local investment teams for review, with a focus on governance, risk and accounting adjustments.
Lastly, we construct the portfolio and constantly monitor its risk.
Our global emerging equities manager works closely with our other emerging equities teams:
- Our Asian equities team has built up a strong track record of outperformance. Consisting of five members based in Hong Kong, the team also draws on the expertise of our China team in Shanghai and our Taiwan team in Taipei.
- Our Russian equities strategy is run by a Russian national who has in-depth knowledge and understanding of the local market. He has full access to UBP’s broad-ranging emerging market expertise.
- Our Turkish equities strategy is run by a manager with 22 years of experience in the local market, as well as a long track record of outperforming the benchmark. He is backed up by two in-house analysts, based locally in Turkey, and has full access to UBP’s wide range of emerging market expertise.
Most of these specialist teams include locally based members, which enables them to use local knowledge to identify themes of particular interest that we can apply at country and company levels.
Asian equities offer investors a huge range of opportunities. The region is continuing to carry out reforms designed to strengthen its underlying economies, leading to new growth opportunities for innovative companies. It is also a net energy importer, meaning it is benefiting from the current low oil price. Meanwhile, Asian equity valuations look attractive, having already priced in a crisis-like scenario, despite this appearing unlikely.
We manage our core Asian equity strategy according to a predominantly bottom-up approach, concentrating our portfolio in emerging businesses that we believe are in the early stages of a growth phase. We also ensure it is better diversified at country and sector levels than the broader index.
- Reforms aimed at strengthening regional economies are being implemented across Asia.
- Real interest rates remain positive across the region due to the global oversupply of oil, so central banks have scope to cut interest rates to spur growth.
- Valuations are attractive as Asian equities are pricing in a crisis-like scenario.
- Asian equity indices are heavily skewed towards the largest companies and countries, providing considerable scope for outperformance.
Commonly viewed as one of the highest-potential and business-friendly of all the emerging markets, Turkey is expected to be among the world’s twelve largest economies by 2025. Moreover, while domestic participation in the Turkish stock market is currently very low, we expect this to grow over the coming years, to the benefit of early market entrants.
Our Turkish equities strategy provides investors with access to the high growth potential of the Turkish market, with a particular focus on the under-researched small- and mid-cap segments. We run it according to an entirely bottom-up process, using the knowledge of our team in London and local analysts in Turkey to produce a concentrated portfolio of high-potential stocks.
- The Turkish economy has considerable growth potential, boosted by favourable demographic factors and a supportive economic management.
- Turkish equities are trading at a discount to developed equities, despite their better growth prospects.
- Development of private pensions and pro-savings policies should boost domestic participation in the stock market, helping to reduce volatility.
China remains pivotal to the global economy, as the current growth rate of 6%-7% per year is adding around USD 1.3 trillion to the economy, much the same amount as resulted from its 10% growth in 2010 and 14% expansion in 2007. Meanwhile, the government continues to implement reforms by internationalising the currency, increasing foreign equity ownership and improving returns at state-owned companies.
Our Chinese A-shares equities strategy is managed by an on-the-ground team of nine investment professionals with extensive experience and a proven track record in the asset class. The strategy follows a combined quantitative-qualitative approach to produce a high-conviction portfolio made up of quality growth companies.
- The Chinese economy continues to expand as its growth engines shift from exports to consumption.
- Evidence of the success of reform measures has surfaced, most notably the rise of the country’s service sector, which now accounts for more than half of the economy.
- Most Chinese equity sectors are cheap, relative to both their own historical levels and developed markets.