At the beginning of this year, if someone had offered you the option of investing in an investment trust focused on Asia or an trust invested in Europe, which would you have chosen?
Odds are that you would have looked at growth in the east, mulled over the obvious sovereign default on the way in Greece, noted that the average Asian investment trust saw its net asset value (NAV) rise by 30% in 2010, assumed that this performance would continue – and thrown your lot in with Asia.
You wouldn’t have been alone in doing so – the idea that Asia would outperform in 2011 was very much the consensus view. But you would have been completely wrong.
So far this year, according to Oriel Securities, the net asset value (NAV) of the average Asian investment trust has fallen by 5%. That of the average European trust has risen by 4%. It’s been a good year for contrarians (those who keep in their heads Keynes’ famous advice that “when you find anyone agreeing with you, change your mind”). It hasn’t been so good a year for those moving with the crowd.
So what next? There is still a general assumption that Greece is done for, and that its default will cause both global financial chaos and falls in European equity markets. And there is still general agreement that emerging markets will provide higher returns than developed markets: Seven’s Justin Urquhart Stewart quotes a recent survey that found 90% of investors “are interested in emerging market funds”.
But given that it is clearly useful when investing to look at the consensus and then disagree with it, let’s look at the counter case.
Europe is definitely in a whole pile of trouble. Greece hasn’t banished its day of reckoning with this week’s vote on austerity. Its debt is still there and it is still too high to ever be paid back. So, one day, one way or another, Greece will default.
If it does, others might, too. And even if they don’t default, the likes of Portugal and Ireland might be back for another bail-out of one kind or another. None of that will do either Europe or America’s banks many favours.
However, this ongoing sovereign debt crisis isn’t a secret and the consensus on its end game isn’t remotely contentious, either. Everyone thinks the game is all but over in Greece and everyone has invested accordingly. That’s why they are steering clear of Europe and why European stock markets look relatively cheap: the current cyclically adjusted price/earnings ratio – or CAPE (one of the few valuation methods that actually appears to be able to forecast the future) for the MSCI Europe index is around 15 times.
It is also worth remembering that while Europe’s troubles are at the front of every fund manager’s mind, Asia is in a bit of a pickle, too. But we can’t quantify the risks in many emerging markets quite as precisely as we can in Greece.
Take China. There’s the risk inherent in the fact that China – like many emerging markets – is not a capitalist country. Instead, as John-Paul Smith of Deutsche Bank points out, the main driver of the economy is the state – how it manages the banks, how it deals with the listed companies it controls, and the economic policies it pursues that “interfere with market forces”.
Then there is the property bubble (the taxes from which many of China’s local governments rely on). There is the massive explosion of debt across the country. There is inflation. There is extreme inequality.
And there is the fact that, while we all think China is growing its GDP at 8% plus, it may not be. Back in 2007, Vice Premier Li Keqiang admitted that the likes of electricity consumption, rail cargo volume and bank lending were better measures of growth than GDP numbers. If so, say analysts at Hong Kong based Asianomics, growth is often much lower than the market thinks – which given, the fall in consumer confidence in its main market (the US) should probably come as no surprise.
Finally, for investors, there is lack of transparency: I wrote a few weeks ago about Sino Forest, a popular US listed Chinese company that doesn’t appear to have the business it claims. It isn’t an isolated case.
These aren’t the same problems as those in Europe. But they hardly suggest clear waters ahead. And while Europe’s problems are easily seen in its stock market valuations, those of the east aren’t. The CAPE of the MSCI China index is not far off 30 times.
I’m not mad about being in equity markets at the moment but beyond gold and cash (both of which are worth holding, one because of low interest rates and one despite low interest rates) there aren’t many places for the risk averse to go.
So, if you feel you must be in equities, look at what everyone else is doing and think about buying into a European investment trust instead. Oriel suggests Jupiter European (its shares are trading on a 10% discount to NAV), Fidelity European (12% discount) or, if you can cope with smaller companies, JPMorgan Smaller European (15% discount).
• This article was first published in the Financial Times