Group believes investment risk in developing markets has fallen as capital discipline has risen
Barings Asset Management is to increase the alpha in its emerging market and Asian funds, Michael Hughes, chief investment officer at the group has told intermediairies.
In his address at the group's Global Investment Conference held last week, Hughes said Barings takes the view that many developing markets, which have outperformed developed markets, are now less risky than in former years.
Hughes said risk in emerging markets has been falling and will fall further, leading the group, which is among the best-known emerging markets managers, to up the alpha in its portfolios.
Following on from Hughes's speech, James Squire, Barings' Asia Pacific equity investment manager, said since the 1997 crisis, Asian companies and banks have developed a capital discipline that has allowed them to increase liquidity and pay off debt.
Moreover, since Asia was recovering from its bust in the late 1990s, it has avoided over-investment in the IT sector, unlike Europe and the US.
Squire said in these markets, locals are keeping their money in cash and going forward this is more likely to be invested in property and consumer products, which will boost local demand and reduce many Asian emerging economies dependence on exports.
The UK equity market continues to weaken, however. This has opened up value relative to bond markets, which are fairly valued. Errol Francis, the UK and Europe equity investment manager at Barings, said the distortions caused by the technology, media and telecoms bubble in the UK mean investors are still struggling to assess fair value for the market.
However, the P/E convergence between high and low-growth stocks indicates the UK market is trading at fair value.
Francis said the Baring UK Growth Trust is positioned for a modest recovery. The trust has underperformed its benchmark index on a three-year basis, with the index falling 22%-23% while the trust fell 25%. However, on a six-month basis, the trust marginally outperformed the benchmark, returning -14% while the index returned -15%.
The portfolio is overweight the banking sector, investing in banks with strong revenues and lower costs such as Royal Bank of Scotland and Northern Rock, while avoiding banks such as Abbey National.
Another sector Francis finds attractive is housebuilding. He said the market does not feel confident about the sector because of fears it will suffer the same fate as it did in the 1980s.
However, he argued, since then the sector has seen a lot of consolidation and, as a result, housebuilders are more concerned in generating returns than volume. The portfolio is underweight pharmaceuticals, mainly because the sector has been hit by bad news and has not been able to generate new drugs quickly enough.
On technology, Francis said: 'Companies are struggling with the hangover of the 1990s and are still encountering negative newsflow ' ARM has a P/E ratio of 35 times earnings. Although there are growth opportunities in the market, we want to wait for the signs of the bubble to disappear.'
Both Hughes and Rory Macleod, Barings' head of fixed-income and currency, believe the UK is not likely to undergo deflationary trends. Macleod said around 50%-60% of the consumption price index is made up of services and the price of services has not decreased. Moreover, the goods sector, which is likely to suffer from a fall in prices, makes up around 10% of the index. Out of that, alcohol and cigarettes are taxable so the deflation risk is lowered for these products.
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