Emerging markets need more prominence

Australian investment portfolios are significantly underweighting the emerging Asian markets, according to the head of a leading global fund manager.

Speaking at his organisation’s road show on global markets, managing director of Fidelity Investments Australia Michael Ohlsson said despite the rapid increase in the value of emerging markets they still represented only 5.5 per cent of the Morgan Stanley Capital International (MSCI) world indexes, and urged the audience of planners to consider weighting Asia in their clients’ portfolios.

“One issue that our industry still needs to grapple with is where do the emerging Asian markets, and in particular single country funds like India and China, sit within our portfolios? In Australia, there is a significant underweighting of our clients’ exposure to this very large and important market,” he said.

However, Ohlsson stated that while it was reasonable to expect that over time weighting of the Asian markets will increase, “these markets are still hugely undervalued relative to their economic might”.

“Despite this underweighting, I must say there are a lot more Asian funds being launched. Indeed, last year’s net flows into retail and wholesale Asia funds increased by a staggering 60 per cent.

“The emerging markets of Asia ex Japan are gaining more interest from Australians in particular, not just because we’re in the same time zone, but because we have a lot of goods at home with that ‘made in China’ sticker on them, we get those telephone calls from telemarketers in Mumbai and Deli, and not to forget China’s demand for our raw materials pushing our share market to yet another record high,” he said.

Ohlsson went on to say that this gap between share market valuation and a region’s economic output is part of a normal delayed reaction, and investors needed time to be comfortable and confident in emerging economies.

“There are several reasons why. Firstly, Australians want to see evidence of growing stability and a legal system that enshrines property rights. Secondly, they want to see a sound and robust investment infrastructure. And most importantly, they have to be confident that these high levels of economic growth are sustainable over the long term,” he said.

“Asia is improving all the time on these measures, but there is further to go. Over time, these economies will be better respected in share market valuations and on the MSCI index.”