Emerging markets 'a tough call'

Emerging market equities are a troubled asset class vulnerable to influences such as the unrest in Ukraine, says Lars Wincentsen, of Carnegie Asset Management.

Wednesday, March 5th 2014, 5:55AM

by Susan Edmunds

He was in Auckland this week, for meetings held by BNP Paribas.

Carnegie has US$15 billion in FUM, mostly in global equities with a large cap bias and low levels of turnover. It is expanding into New Zealand - its biggest existing client is in Australia.

Emerging markets were susceptible to upheaval, he said. The Micex index fell 10.8% as the turmoil intensified this week.

But they were also vulnerable to factors such as the tightening of US monetary policy. He said before 2000, the markets showed growth rates of about the same as developed markets, or only about 2% more.
But once cheap money became more freely available, they took off.

“Many would argue that there’s a bubble in China… we’re not so certain but with interest rate tightening the dollar will strengthen and that does mean bad news for emerging markets.”

India was a key opportunity, he said, where income growth was averaging between 8% and 12%.

Carnegie took a selective approach, he said. Its only investment in India was in HDFC, which provides mortgage finance. Sixty per cent of India’s population is aged under 30 and potentially on the brink of wanting to enter the housing market. HDFC had issued four million loans in its history, for an average $35,000 and had not had one bad debt.

But he said emerging markets’ equities tended to be in firms that went for growth rather than profit, so it could be hard to find stocks worth buying. Much of Carnegie’s exposure was via companies that catered for the market, such as Visa, which is experiencing strong growth in companies where electronic transactions are not yet the norm.

Other trends that Carnegie had identified as drivers of its investment decisions were the move to mobile technology and energy efficiency.

Carnegie reports a return on portfolio of 11.2% over one year, 10.6% over three and 15.1% over five. It has an active return of -1.5% over one year, 2.9% over three and -0.2% over five.

Wincentsen said the manager had experience a challenging one-year period due to stock picks and currency movements and had a challenging 2009.

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