InvestmentsAug 5 2016

Allianz’s Ghosh calls end to EMs’ ‘pariah’ status

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Allianz’s Ghosh calls end to EMs’ ‘pariah’ status

Allianz Global Investors’ Kunal Ghosh believes the UK’s decision to leave the EU could spark a renaissance for emerging market equities as investor worries begin to centre on other parts of the globe.

Mr Ghosh, who runs the £194m Emerging Markets Equity fund, formerly known as Bric Stars, is seeking to capitalise on this theory by investing a greater portion of his portfolio in countries that have improved their trade situation.

The manager said he is likely to shift a Russian overweight towards India and other countries that have got their houses in order after current account deficits saw investors turn against them amid 2013’s ‘taper tantrum’.

“[After] the last five years we’re getting into one of the most bullish positions for emerging markets. We find the US is offering safety with a high valuation, and Europe needs to resolve its problems, and this allows emerging markets to come out on top. What Brexit did was turn the UK and Europe into the pariahs of the investment community rather than emerging markets,” he said.

Mr Ghosh had been overweight the Russian market as he believed expectations had become overly pessimistic, describing his allocation as a “function of expectation”.

“The market expected Russia to have a horrendous economy and it did not,” he said. “That expectation trade can only last so long, and you have to have positive growth to sustain the outperformance, so we might trim our positions and shift to the more positive parts of the [global] economy.”

He is keen to move some of this 8.4 per cent portfolio allocation to India, which accounts for 8.7 per cent of his fund.

“India is switching gears and we are expecting a capital expenditure cycle from mid-2017 because reforms are trickling into place,” he added.

He said recent changes in property regulations had made mortgage lenders attractive, helping holdings in banks HDFC and LIC Housing Finance. The fund has been adding to this space while cutting back on exporters.

Mr Ghosh also recently added Hindalco Industries, an Indian aluminium trader with a strong domestic focus.

“We had partially hedged to a weakening of the Indian rupee, and these hedges are the ones we would take off, like the technology and pharmaceutical sectors which are exporters,” he said.

South Korea remains the fund’s largest allocation at 20.6 per cent, and the manager is also bullish on China. The fund has 15.7 per cent in the country, its second largest geographical weighting.

Mr Ghosh said China’s decision to slow its transition to a free-market economy may cause concern among democratically minded investors, but it was not a significant barrier to investment opportunities.

“A [command economy] still leaves you ample opportunities to make money in China. This economy has delivered double-digit economic growth for almost 30 years,” he said.

He highlighted opportunities in consumer stocks – such as education, healthcare and lifestyle – as this area was less likely to face state intervention.

The Allianz Emerging Market Equity fund has returned 25 per cent over three years compared with a 12 per cent IA Global Emerging Markets sector average, according to FE Analytics.