Morningstar Magazine - February/March 2015 - 28

Dispatches

A shares traded at a 10% premium to H shares,
after the launch of the Stock Connect program.
With the potential to see A shares added to major
indexes in the next few years, A shares may
become part and parcel of investors' diversified
portfolios. The Chinese government's recent
financial market liberalizations led MSCI to
consider adding China A shares to its Emerging
Markets and All Country World indexes, to
be decided in mid-2015. But before then, investors
can decide for themselves whether to take
on or increase their A-shares exposure, and ride
the Chinese equity market roller coaster,
through the growing selection of A-shares ETFs.
Caroline Gutman is a mutual fund analyst with
Morningstar's European passive fund research group.

Does the Term
"Emerging Markets"
Still Apply?
Emerging markets could be null and void as a
moniker before long. Like one well-known
purple pop star, they may soon be referred to as
the Countries Formerly Known as Emerging
Markets. Data reveal that emerging nations are
splitting clean in two: divided in terms of trade,
currency strength, inflation, and the public purse.
Take, for example, inflation. There are 62 countries
in the JPMorgan Emerging Market Bond Index
Global. Thirty-two of these have inflation rates
below 6%. But 24 of them are battling inflation at a
rate of more than 6%. Foreign-exchange reserves?
Thirty-four countries have FX reserves
of more than 15% of GDP, but 28 countries do not.
Credit ratings reflect a split too, with 57%
of bonds issued by emerging markets rated BBB
or higher, and the rest technically risky highyield instruments.
Jim Barrineau, Schroders' head of emergingmarkets debt, said the phrase emerging
markets is becoming increasingly difficult to use
to describe this group.

Morningstar February/March 2015

"There have been a number of factors that have
influenced both bonds and equities in
emerging markets," said Barrineau at a conference in New York in December. "These markets
are maturing, liquidity has dried up thanks
to the end of quantitative easing, commodity
prices have declined, and there has been
a resulting sharp decline in foreign exchange
reserves. But these factors have not affected all
emerging markets equally."
Falling commodity prices have been bad for Brazil,
Russia, and Venezuela, whose economies are
largely dependent on exporting natural resources,
which have slumped in value. But for countries
such as Chile it has been a mixed bag. Chile
exports copper, but imports oil, so it has been a
net beneficiary of the commodity slump. Similarly,
Indonesia exports metals, but imports oil and
iron. It, too, has benefited from cheaper costs.
Barrineau said that some emerging economies are
learning to adapt. Russia's currency is in free fall,
for example, but then so is the price of oil.
Currency weakness could be a positive because it
could lead to investment opportunities.
"Currency weakness makes for a more competitive
economy and means a nation is more attractive
to foreign investment," he added.
Having said this he remains concerned about
Russia's fundamentals, as well as those of Chile,
Peru, Mexico, and Turkey.
Asia, on the other hand, is a net beneficiary of the
commodity bust. But it also has fiscal stability
and is undergoing significant reform of its political
systems, making it a positive story among
emerging markets.
"High economic growth rates will remain a key
attraction of many emerging markets, in
our opinion. Even with major economies like Brazil
and Russia slowing down, overall growth in
emerging markets during 2015 is expected to be
comfortably in excess of that achieved by
developed markets, with China and India likely to
drive the Asian region to particularly strong
growth," said veteran emerging-markets investor
Mark Mobius of Franklin Templeton in a recent

report. Mobius also pointed out that Southeast
Asia is likely to be boosted by Japanese quantitative easing, which the Bank of Japan confirmed it
was extending on Oct. 31 by ¥80 trillion, or $712
billion, each year, up from ¥60 trillion.
Emma Wall is the web editor of Morningstar.co.uk in the
United Kingdom.

Search for Yield
Is a Tricky Exercise
GREATER EUROPE

France
How do investors generate yield when global
economic growth is subpar and central banks keep
injecting vast amounts of liquidity into markets
all over the world, two factors that put pressure
on interest rates? That's a tricky question
institutional investors have to deal with when they
think about asset allocation for the long run.
The question is even trickier in France when the
country's investors consider how their portfolios
are structured. According to data published
by the French Association of Institutional Investors,
a group that represents 74 institutions with
more than EUR 2 trillion under management, fixed
income accounts for 73% of that total. Equity
accounts for 14%, while alternative strategies (real
estate, hedge funds, and private equity)
represent only 10% of assets under management.

France Loves Fixed Income:
Average asset allocation % for the
country's institutional investors.
Fixed Income
Equity
Private Equity
Real Estate
Loans37%
Hedge Funds
Other
Source: French Association of Institutional Investors

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Morningstar Magazine - February/March 2015

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