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Investors 'forgot' China is an emerging market

Investors 'forgot' China is an emerging market

Investors have been warned against forgetting that China is still an emerging market and presents the risks associated with that, according to the guests on the latest edition of the FTAdviser Podcast.

Mark Williams, manager of the Somerset Asia Income and Somerset Emerging Markets Dividend Growth funds, said the market turbulence caused by the Evergrande liquidity crisis and the wider regulatory crackdown should act as a wake-up call to some investors.

Chinese equities have lost 11 per cent over the past three months because of concerns about an ongoing regulatory crackdown in the country. But these worries have been exacerbated by the liquidity crisis facing property giant Evergrande. Both of these developments have combined and rippled through global markets.

Williams said: "The biggest lesson from this is maybe it is a wake-up call or reminder that emerging markets are called emerging markets for a reason, and China was an emerging market.

"What that means is there are certain elements of risk within those markets, and I personally feel this is something that maybe people forgot. Particularly with the huge weightings that there in some of the internet names, they just continued to grow.

"The likes of Tencent and Alibaba are fantastic companies, they are limitlessly scalable, they create huge profits. There is a reason for that but at the end of the day they are called emerging markets because there are risks inherent in them that you don't necessarily get in developed markets.

"We talk about what's going on in Venezuela, maybe Argentina and Brazil on a political level, and maybe everyone expects it. I think when people looked at China they didn't really see that."

Abhi Chatterjee, chief investment strategist at Dynamic Planner, pointed to the fact many emerging markets had high sector concentration, for example a lot of technology companies.

He added: "Emerging markets are integral to growth in the economy. We look to them not only as sellers, but also as consumers contributing to growth.

"But [...] people have just been buying beta without doing research. Emerging markets are called emerging markets because there is a reason for it. You have to do your due diligence and research and not just go and buy an ETF or index and hope to reap the windfall benefits.

"[Investing in emerging markets] has to be done in a nuanced, investigative way so that you are aware of the risks you are taking and building a portfolio to take care of all the risks and create a better diversified portfolio."

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damian.fantato@ft.com