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The Asia component is what’s attractive about EM, says 7IM

The US dollar and oil prices make emerging Asia the preferred investment region, according to senior portfolio manager Peter Sleep at wealth manager Seven Investment Management.

The UK-based firm has taken an overweight position on Asia as a whole, which Sleep said is benefitting from both weaker currencies and lower oil prices.

“We invested in emerging Asia because we felt it would benefit from weaker currencies and the stronger dollar because the US is a major export market,” he said.

“We also thought it would benefit from lower oil prices because these economies are not oil producers while at the same time they are not commodity producers like Russia. So they haven’t been impacted by the fall in commodity prices either.”

Although he said the oil price now “looks like it is starting to bottom out”, Sleep said the firm will not reduce exposure to emerging Asia. Instead, it will start to rebuild allocation to Brazil and Russia while reducing weightings to the developed world.

“We don’t have as much exposure to the UK as our main competitors do and we also don’t have much in Europe or Japan,” he said.

In the firm’s balanced portfolio, looking at equities, emerging markets get the highest allocation at 13.8% compared to Europe (7%), the US (12.5%) and the UK (9.9%).

Japan head-scratcher

Japan is not an emerging market, but it is an Asia-Pacific country that the firm has underweighted.

Sleep believes Shinzo Abe’s “three arrows” — fiscal stimulus, monetary easing and structural reforms — are not hitting the intended targets. That view, however, seems in contradiction to what is going on in the domestic market. 

“[Japan] is cheap and looks like great value – and it’s got great tech companies – but we can’t find anything really to compel us to buy it.”

The result is that Japan leaves the investment team “scratching our heads”, Sleep said, and therefore without strong conviction to allocate.

India, on the other hand, may be expensive in comparison, but the reform-minded government led by Narendra Modi seems to have the political will to push through reforms such as the recent Goods and Services Tax bill.

Although highly-praised Raghuram Rajan, India’s US-educated central bank chief recently left, his replacement, deputy governor Urjit Patel, is expected to steer the course in a broadly similar way. The firm has bought into a fund that accesses India’s Nifty 50, the National Stock Exchange of India’s benchmark stock market index.

In regards to China, 7IM has gained exposure via the MSCI China Free Futures Index, a benchmark that not only covers Chinese domestic A shares but also Chinese companies such as Alibaba that are listed on overseas exchanges.

The firm will continue to reduce weightings to the UK, Europe and Japan in response to an increasingly positive view on other emerging markets, Sleep added.

Risks are a change in government in India and a presumed loss of control by the Chinese government in managing the country’s increasing corporate defaults. These events could trigger a reassessment of its allocation, he said.

Part of the Mark Allen Group.