Why your clients should have less in emerging markets for the long-term

The evolution of the Chinese economy means emerging market equities are much less attractive than they have been for many years, according to Fahad Hassan, chief investment officer at Albemarle Street partners.

Hassan said: “Emerging markets equities played a key role in portfolio returns during the 2000’s. The emergence of China as an economic powerhouse and its impact on commodity demand spurred a decade of outsized returns from EM equities. Since the Global Financial Crisis however, many of the forces that drove this outperformance have reversed. Chinese growth has slowed meaningfully and is far less capital intensive.”

The significance of the growth being less capital intensive is that, such growth requires less capital investment, and so Chinese demand for many commodities declines. 

This negatively impacts the economic performance of the commodity exporting countries in the emerging markets, such as Brazil and Russia. 

Hassan said: “Commodity prices have declined which has pressured the fiscal wherewithal of many emerging market governments. Emerging market equities help to diversify equity returns but no longer provide a return advantage versus their developed counterparts. China’s authoritative stance, currency instability and the uneven impact of COVID crisis should result in lower EM allocations in globally diversified equity portfolios.”

Many Chinese equities sold off in August as a result of Chinese government policy announcements related to  private education providers and technology companies.

david.thorpe@ft.com