INTERVIEW: Brexit Turmoil Only Highlights Asia's Attractions - Wells Fargo

Tom Burroughes

1 August 2016

Fewer people are making “doomsday” predictions about China, and the Asian giant, along with certain other emerging markets, has won back investment fans after the difficulties of recent years, a fund manager says.

Concerns about the fragility of China’s financial sector and economy, due to a deceleration in growth, have been “hugely” overstated, creating a situation where assets such as equities became highly attractive, Anthony Cragg, a senior portfolio manager at Wells Fargo, told this publication recently. Cragg is a lead portfolio manager of the Luxembourg-registered China Equity Fund and Emerging Markets Equity Income Fund at Wells Fargo Asset Management.

About $1 billion of international fund flows have gone into Asian emerging markets over the past eight to nine days, Cragg said, citing figures given on 20 July from Credit Suisse.

“That’s a pretty heavy infusion of investment,” said Cragg, who was also interviewed here in February, when he was also bullish amid difficult headlines. (To see that interview, click here.)

The 23 June Brexit vote, which triggered a bout of volatility in global markets, led some investors to take a more favourable relative view of emerging markets on the assumption that they would be less affected than some other regions, and so it has proved, he continued.

Emerging markets have broadly outperformed their developed counterparts since the start of the year, he said. For example, the MSCI Emerging Market Index, in dollars, shows total returns of 11.8 per cent so far this year, when capital returns and reinvested dividends are taken into account. For the MSCI World Index of developed countries’ equities, total returns are 3.96 per cent (source: MSCI Barra).

As far as China is concerned, the MSCI China 50 A Index shows total returns (capital growth plus reinvested dividends) of 2.8 per cent, in dollars.

China has continued to open its doors to investors, widening investment quotas for foreign investors, allowing Hong Kong-based and mainland China-based funds to be bought and sold cross-border in both locations, and loosening up some capital controls. The renminbi currency has grown in stature as a global reserve currency, although in June China had a setback when the MSCI index provider delayed inclusion of mainland China shares into its flagship emerging markets index for the time being.

While emerging markets in the past suffered from a higher risk profile than was typically the case in more developed countries, Brexit and other political woes in Europe and the US have changed perceptions, and prove how “antiquated” old asset allocation approaches were, Cragg said.

Cragg said that his portfolios have a strong focus on equity income, responding to clients’ needs, and that this area of the equity market has produced the most growth for his business recently. At the time of writing, assets under management across his emerging market strategy are $1.65 billion.

The Emerging Markets Equity Income Fund (inception date, 29 June 2012) has returned 2.08 per cent since inception to June 2016 whereas the index declined 0.47 per cent over the same period. The single-largest holding in percentage terms is China Mobile (2.45 per cent), followed by China Petroleum & Chemical Corporation Class H (2.23 per cent); the largest jurisdiction allocation is to Hong Kong, at 20.7 per cent, against a benchmark of 20.69 per cent, followed by Taiwan (16.25 per cent versus 12.07 per cent).