Global managers have reduced their exposure to emerging markets amid the recent market rout and fears of persistent problems beyond the short-term volatility.
Statements from US Federal Reserve chairman Ben Bernanke about tapering quantitative easing measures and worries about China’s banking system have led to a rout in emerging market equities and bonds in recent weeks.
The sell-off has hit some global managers hard and left them with the feeling more longer-term problems could be on the horizon.
Jacob de Tusch-Lec, manager of the Artemis Global Equity Income fund, has been hit hard by the sell-off in emerging market stocks as he had been building up positions in what he termed ‘boring’ businesses, which made up 10 per cent of the fund prior to the falls.
He said: “The sell-off we have had has happened in all the things we thought were safe. It was a big curveball that hit the markets. The crowded trades sold off, and one of these happened to be boring emerging market stocks which we heavily owned.
“It was a sell-off in bond proxies, and we had a fair bit of money in those, such as utilities in the Philippines and real estate investment trusts in Singapore.”
The manager said he had been rotating out of some of those bond proxies and putting the money into the US, though he said it was not a “wholesale departure from emerging markets”, adding Thailand had been sold off so much that it might now be a buying opportunity.
Ardevora’s Jeremy Lang said he had “significantly scaled back” his direct exposure to China since the start of the year in the company’s Global Equity fund and that he even had worries about multinational companies with operations in China.
He said: “We believe the Shibor [Chinese interbank lending rate] issues are symptomatic of deeper problems within the Chinese financial system. Shibor has been misbehaving since the end of 2011, and suggests to us there are systematic funding issues inside a Chinese financial system which the government is finding increasingly difficult to control.
“In addition, we have read a number of company trading statements recently that hint at Chinese-based costs rising at the same time as Chinese-based competition is getting more intense.
“We fear China is becoming less of an opportunity for companies and more of a risk.”
In the month from May 22, when comments first appeared indicating the Federal Reserve had begun to consider when it will taper quantitative easing (QE), the MSCI Emerging Markets index fell 17.2 per cent, compared to a fall of 7 per cent in the S&P 500 and 11.5 per cent from the FTSE 100.
Many emerging markets had been beneficiaries of loose US monetary policy, seeing a lot of the QE money flowing into their markets, but fears of tapering led to huge outflows from those markets.
This was exacerbated by a spike in the Chinese interbank lending rate, Shibor, which raised fears once again about China’s shadow banking system, which is suspected of hiding huge numbers of bad loans.
However, Peter Kirkman, manager of the £122.3m JPMorgan Global Consumer Trends fund, said he had 25 per cent of his fund in China and was buying into more Chinese cyclical plays to take advantage of the volatility, which he saw as short-term.
“There have been lots of scares surrounding consumption in China, but most of the volatility is around investment. Consumption has been remarkably consistent,” Mr Kirkman said.
“There are a lot of issues with China, such as the big credit expansion, and credit costs will have to go up. But China has a lot of tools available to it.”
