Ed Kerschner, CFA, Chief Portfolio Strategist,
Columbia Threadneedle Investments talks with Julie Cooling, Founder & CEO, RIA Channel about the trends and growth in emerging markets.
Emerging Markets represent 40% of the global economy and it is growing over 5% annually. The growth in EM is accelerating. Kerschner discusses investing in beta products versus strategic beta funds or ETFs.
Ed Kerschner has his gorilla strategy, and it’s no exactly rocket science. You buy the biggest, chest-pumpingly largest consumer-related stocks that will benefit from the ongoing middle income boom that is taking place every day outside of the core economies.
“For me, it’s all about the gorilla consumer plays in emerging markets,” says Columbia Threadneedle Investments’ chief portfolio strategist. Here’s what he means. It’s pretty simple. One look under the hood of the 44 stocks listed in the Columbia Greater China Fund (NGCAX) and you got if figured out: overweight IT, underweight financials. Overweight consumer discretionary and healthcare by far and underweight industrials, energy and real estate.
Columbia’s China fund is its best performing fund this year, with net gains in the NAV of around 15% as of April 7. It hasn’t been a pretty run for China ever since the 2013 “taper tantrum”. Nor has it been great for the bulk of the world outside of the United States and maybe Germany. In fact, for most, the U.S. has been the sole emerging market, or the only game in town.
Columbia’s analysts think that is changing and they cite the International Monetary Fund as evidence more than fund flow data.
Last year, the IMF estimated emerging market growth of 4.1% and developed market growth of 1.6%. It was the tightest differential between emerging and core markets in years. But heading into the second half of last year, emerging markets came out of the doldrums. The IMF now thinks that emerging market growth beats the core at a great pace in 2017 and for the next three years.
“Investors look back and see underperformance, but I don’t think that’s going to happen now,” says Kerschner.
Big consumer plays in emerging markets is a basic mathematical equation. There are three billion new consumers in emerging market now, according to Ernst & Young. These countries all home to the largest growth of middle incomes in the world. In 2000, India and China were home to maybe 1% of the global middle class. But by 2021, it is believed that China will surpass the number of American middle class and a year later India will follow suit.
Investors are still toying with the idea of a possible border adjustment tax that could hurt global trade. The 20% tariff is not very popular here, but a few heavy-weight U.S. companies are behind it, including Boeing and Caterpillar who see it as a way to get a zero percent tax on exports. No one really knows how that will affect sneaker sales in China, or hurt Brazilian demand for beef and chicken. Probably not a whole lot on the demand side, maybe more so on the inflation side if it requires an imported good. Both of those items, for instance, are domestically produced consumer goods.
If the BAT goes into affect, the U.S. risks facing retaliatory actions more than emerging markets do because nearly half of U.S. goods are going to the emerging world while only around 25% of emerging market exports are heading to the U.S. For instance, Brazil and Argentina’s biggest trading partner is China.
When investors think about investing in emerging markets, their initial thought is, “Well, I’m just going to go buy a benchmark fund,” Kerschner says. “But that really doesn’t have a lot of exposure to the consumer. It’s less than 15% consumer stocks. It’s got a lot of energy, got a lot of basic industry, it’s got a lot of industrials, it’s got a lot of everything else, but it doesn’t have a lot of the consumer.”
“You want to buy within the market that makes emerging markets attractive in the first place and that’s consumer,” he says. “That’s where the growth is the best.”
