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The Boom and Gloom of Emerging Markets and China.

By Tony Densley
October 7, 2021


There has been some concern in the market chatter re the problems of a company in China called Evergrande.  Although the average Australian may not be aware or concerned it is a good idea to be at least informed. Emerging markets have been in the news with concern about the contagion impact of potential failure of Chinese property developer Evergrande.

• Emerging markets have been in the news with concern about the contagion impact of potential failure of Chinese property developer Evergrande.

• This crisis highlights the importance of being selective in emerging markets and avoiding those old economy sectors like real estate and financials, as the Chinese government pivots toward domestic consumption, new economy sectors and ‘common prosperity’.

• Emerging markets can be a rocky ride and recent volatility can provide an ideal entry point. Astute investors allocate to emerging markets to capture this long-term growth opportunity as part of a well-diversified international portfolio strategy.

• It is important to be selective because not all emerging markets companies are desirable from an investment perspective and identifying those companies best positioned to perform through the cycle is difficult.

• There is significant performance dispersion among active managers in emerging markets, but the reality is, finding the active manager that consistently outperforms is difficult.

The biggest growth story with emerging markets over the past 20 years has been China. China has been driving global economic growth, but growth there is now at risk due to the collapse in Evergrande. Evergrande is China’s largest property developer by bond market issuance and it is trying to restructure its debt. But China’s property sector woes are just starting, and a government rescue package may be at odds with its stated policy. China’s ‘common prosperity’ policy is focused on lower housing prices and delivery of units.

Evergrande has come at a time when Chinese growth was already faltering. Property represents 20% of GDP growth. Chinese growth could get hit.

The Chinese government owns many banks in China and as a result, they may be immune from a typical contagion event as it is likely that the authorities will ensure the banking system integrity. From a holdings perspective, EMKT has 15 companies in the financial sector across both Hong Kong and China, making up 7% of the portfolio. A vast majority (~80%) of the sector are companies involved with asset management and investment banking as opposed to commercial banking. Conversely, MSCI Emerging Markets Index has 82 financials of which 40% are banks and those directly involved with commercial lending such as China Merchants Bank, which are at the greatest risk.

So, what has all this got to do with you?  Many fund managers are already factoring in these concerns and emerging market funds may take a small hit and some may profit. The secret is to be diversified both with your allocation as well as your fund managers.    

At Forward360 we are well aware that markets fluctuate, and things can and do change. We seek to diversify your portfolios to both improve long term growth and protect the wealth you have. One of the big factors is that you have advice and can contact us and discuss any concerns with your adviser. However, this so called “Çrisis” is but one factor in many diversified portfolios and generally only 10-15% would be invested in emerging markets, if any. The main reason for this information is so you have knowledge of what is happening and can better review the news knowing your portfolio is equipped to manage these types of storms. 

Disclaimer – The above information should not be construed as advice and should be viewed as general in nature.  Any actions taken without consultation with your adviser are your own risk and responsibility. 

Tony

Financial Planner - Forward360

30 Years Experience. Dip FP. Broad experience across investment, lending, insurance, debt eradication and retirement structuring.Tony Densley is an Authorised Representative of Reedy Capital Pty Ltd (AFSL No. 495539), Authorised Representative Number 250867 and a Financial Advisor at Forward360.

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