Focus on Oyster funds – new EM analysis needed, says Bank Syz’s Quirighetti

Just as investors have acclimatized to seeing emerging markets as an important part of their investment portfolio, Switzerland’s Bank Syz is asking them to change their thinking again, to focus more on different, more appropriate indicators of their economic health.

Fabrizio Quirighetti, chief economist at Swiss Asset Management firm Banque Syz & Co, told delegates at a recent conference for the firm’s Oyster fund range that investors should put more weight in their decisions in retail sales and other consumption data, as many EMs move their economies towards domestic buying.

They should worry less about manufacturing statistics or purchasing managers’ indices, which were arguably more relevant to a previous stage of economic expansion.

“It is important when looking at EMs to change what we are looking for,” he said, using the largest EM economy of China.

“Most of the time people have been looking for industrial production and PMI in China whereas in the US [markets] people are more focused on consumption and jobs.”

As US GDP is 70% dependent on retail buyers, gauging their health and income-earning capacity is important, and logical, to see the overall US picture.

Some EM economies, such as Brazil’s, already resemble the US inasmuch as its consumers make up 80% of GDP.

Not so yet for China, he said, where only 35% of GDP growth comes from domestic consumption. But as Beijing shifts the nation towards a similar economic model – it already grew consumption’s contribution to its GDP by about 10% over recent years – new indicators would become increasingly important for investors, too, Quirighetti said.

“If you look at China export growth slowing or going down, that is ‘old China’, whereas consumption is growing.”

“We are facing a transitions from the export model for most of the [emerging] countries, so wages and salaries should increase and fiscal and monetary policy should be more accommodative. You will still see strong economic growth, but of a different flavour. You should definitely look more to consumption and retail sales and the job market, and not be too worried about the slow down in the export market.”

Quirighetti also said holding EM equities remains the better method over the long term to get exposure to the growth markets – despite strong flows into emerging markets debt products, and despite disappointing equities returns.

He cautioned investors not to take a uniform view of the BRIC bloc, whose models and growth-drivers are diverse.

Quirighetti added some EM nations representing about one third of all EM equities markets should not even be classed as ‘emerging’ any more – singling out South Korea (15%), South Africa (8%), and Taiwan (11%).

The BRIC nations of Brazil, Russia, India, and China still represent in aggregate more, at about 44%, and EMs overall represent about 13% of global equities markets, making most investors heavily underweight in their equities allocations.

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