Emerging markets should no longer be treated as a whole

The globalisation of financial markets has prompted a senior executive of fund manager Nicholas-Applegate to encourage investors to revise their approach towards emerging markets and look at investment opportunities in these regions on a stock-by-stock basis, as opposed to a geographical grouping.

Nicholas-Applegate senior vice president Pedro Marcal said: “In the past, the only way we felt people could get exposure to emerging markets was by buying a dedicated emerging market fund and financial advisers could do that.

“This globalisation that we’ve seen in the last 15 years has really caused a convergence of the correlation of the indices, so you’re not getting that uncorrelated asset class. While it does make sense to have a dedicated emerging markets portfolio in an overall portfolio, it may not be as good as it used to be,” he explained.

Furthermore, when applying this new method to investing in emerging markets, Marcal feels global fund managers have a distinct competitive advantage in being able to assess these types of investments from a worldwide perspective. This allows them to more accurately assess how industries have evolved in the past and apply this history to opportunities in developing markets.

He cited the telecommunications industry in China as an example of this ability.

“When China Mobile was listed in 1998, we bought a position in it. Right after it listed they announced they were going to cut tariffs by 20 per cent across the board and the stock sold off. We saw it and thought, ‘What happened in other countries? What happened when this issue with Vodafone took place?’, and it turned out adoption went up dramatically because of the elasticity of demand at the lower price,” he said.

“We thought that was going to happen in China so we didn’t sell our position and a year or two later the stock was up by 150 to 200 per cent and has done very well. So the global manger has the ability to look at what they’ve seen as these industries have developed in other places and say in emerging markets where these products are being introduced that this is the behaviour of the market and we’ve seen a model of it before,” Marcal explained.