An article by Michael Power, Investec Asset Management

Although the term ‘decoupling’ lost favour as even stock indices in emerging markets tumbled in the wake of the 2008 Credit Crunch, if one looks merely at the macroeconomic performance of the global economy, it is a fair description of what has happened. The world has since divided itself broadly into two economic tracks: the fast one led by the locomotives of China and, to a lesser extent, India versus the slow one headed by the Puffing Billies of the US, Europe and Japan.

In 2009, the rest of the world attached themselves to whichever train most dominated their export profile. Nearly every other country could be classified as one of three types of rolling stock: coal trucks (exporting coal and metals), oil tankers (oil alone) and passenger cars (net resource importers).

It would be neat but incorrect to conclude that the first two resource-rich categories hitched themselves to the growth engines of Asia in 2009 whilst the passenger cars – Mexico and Eastern Europe – had little alternative but to follow their adjacent locomotives. Yes, the coal trucks went with Asia and the passenger cars with Europe and the US but the latter were – in 2009 at least – joined by the oil tankers too as the West’s energy needs were still more oil-intensive whilst the East’s energy needs were still more coal-based. Since then, as China’s oil intensivity has continued to grow apace, the oil tankers have started to ‘jump tracks’ and hitch themselves increasingly to the Asian locomotive, though they have yet to make the transition completely.

Interestingly, there are four countries in the Western Bloc that have ‘jumped train’ too – Australia, Canada, Norway and New Zealand.  Their export profile makes them much more coal trucks or in Norway’s case, an oil tanker, than their Western peers. And this status has served them remarkably well – they have escaped the recent recession with only a few scratches and their currencies are increasingly regarded as safe havens in an otherwise choppy sea.

If the New Normal does grasp most of the big Western markets in its icy grip – though less so Germany, it seems, again because of its export connection to China, in their case of capital goods – then these Western economies are set for a long period of slow growth. By contrast, countries that have resources to export to both the hungry Chinese Dragon and the now dancing Indian Elephant having already shielded themselves from the “global” slowdown. (Note that Western commentators frequently mislabel what has essentially been a Western phenomenon as a “global” one.) And as China’s resource-intensive growth phase still has a good decade to run and India’s equivalent at least three (not to mention their smaller but often still heavily populated Asian neighbours like Indonesia at 235m, Vietnam at 86m, and Bangladesh at 165m), the commodity super-cycle still has very long secular legs. This can only be good for the future prospects of resource-rich nations, be they coal trucks or oil tankers, most of which are in emerging markets.

.

Michael will present key insights on evaluating the implications of commodities prices on emerging markets investing and predictions for future growth at FundForum Middle East, 4th October at 9.50am.

.

About Michael Power, Strategist, Investec Asset Management

Michael began his career working in the Middle East dept at Chase Manhattan Bank before joining Anglo American’s corporate finance department in South Africa.  Michael then worked in the London corporate finance department of NM Rothschild & Sons/ Smith New Court where his responsibilities had a strong natural resource emphasis.  Having completed a 4X4 overland safari through Africa, Michael worked for HSBC-Equator Bank in Kenya for 4 years.  He returned to England to work at Baring Asset Management as a director in their emerging markets department.  Michael was Head of Africa and the Middle East as well as the natural resources sector, and was also portfolio manager for the Pan African Simba Fund.

Anne Richards, CIO, ABERDEEN ASSET MANAGEMENT participated in a panel debate on new asset allocation models for fund selectors at FundForum International 2010 with fellow CIO panellists Rick Lacaille, STATE STREET GLOBAL ADVISORS and  Christian Dargnat, BNP PARIBAS INVESTMENT PARTNERS and moderated by  Amin Rajan, CEO, CREATE-RESEARCH.

In an interview for the Spotlight Series, Anne discussed the double-edged sword that is volatility.  Government bonds have responded well but the Equities Market, with renewed fears about Greece, has experienced more difficulties.  Even in this market, there is more optimism (however cautious) than 12 months ago.

The real growth opportunities can be seen in Asia and Emerging Market economies where the fiscal situation is much better than most of the domestic markets.  Interest is growing in both Emerging Market Debt and Asian Fixed Income.

For the end investor, the key challenge is to responsibly inform them so they understand that volatility is a feature of all investment.  If they have chosen the correct strategy, a little volatility shouldn’t be an issue.  We must avoid the knee-jerk reactions of Q4 2008 (after Lehman’s), when investors panicked, sold out at the bottom of the market and then couldn’t benefit from market improvements in 2009.

Daniel Enskat, head of global consulting at Strategic Insight, opened the Distribution Summit at Fund Forum 2010 with a swift summary of his latest research into the new rules in the post-crisis landscape. The global investment management industry is worth US$ 100 trillion and the largest piece at US$ 27 trillion is represented by mutual funds. “There have been flows of US$2 bn a day into the fund management industry” he said, but banks hold US$ 60 trillion in cash. “How do you get your hands on the cash?” he asked.

The money is coming from the high net worth client base, and a growing global middle class that is now increasingly coming from the emerging markets. As a sign of the times, Enskat told the audience that Bank of China has recently opened a new Chinese private bank in Geneva, staffed by the Swiss and offering a Swiss equity fund in Renimbi.

Never forget the importance of a good story, said Enskat. “Intermediaries love a good story and increasingly service levels are what matter to distributors. Post crisis, fund selectors want more power, more complexity, more concentration and they have a need for more tailored information delivery. The quality of the marketing material available is most important, said Enskat.