Firm’s largest investments are in Chinese technology giants Tencent and Alibaba, as well as Ping An Insurance
Investors are bearish and nervous, which has made equities cheap as an asset class, Nick Payne, Merian Global’s head of global emerging markets, says
As the trade war has intensified and concerns over the global economic outlook have increased in recent months, investors have become too pessimistic and are passing up returns in emerging markets equities, according to asset manager Merian Global Investors.
Nick Payne, head of global emerging markets at Merian Global, said investors are bearish and nervous, which has made equities, as an asset class, cheap because sentiment is poor.
"That's the time to embrace the inner contrarian and buy, but we know that is often the most psychologically difficult time to buy," Payne said. "If you buy when people are euphoric, you don't tend to get great returns. If you buy when people are negative, you get pretty good forward returns."
The United States and China have been involved in a trade war that has raged for more than a year, with the world's two biggest economies placing tariffs on hundreds of billions of dollars of each other's goods.
But, tensions, which flared up again this summer, appear to be easing somewhat as the two sides prepare to resume face-to-face negotiations next month.
US President Donald Trump delayed additional duties that were set to go into effect on October 1 " National Day in mainland China " for two weeks as a "gesture of good will". China responded on Friday by saying it would exclude tariffs on soybeans, pork and other agricultural products.
Against a backdrop of slowing growth, the trade war has been weighing on business sentiment and future investment, which some economists have worried could push the global economy into a recession.
US-China trade tensions are causing an "oversupply of manufactured goods" and weaker demand, according to independent research provider TS Lombard.
….on October 1st, we have agreed, as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25% to 30%), from October 1st to October 15th.
" Donald J. Trump (@realDonaldTrump) September 11, 2019
"On the supply side, Chinese firms facing existing tariffs and fearing escalation, have aggressively reoriented spare capacity to production for domestic markets. The result is a glut in manufactured goods, particularly consumer durables, which is weighing on prices," TS Lombard's Rory Green and Bo Zhuang said in a research note on Thursday. "Consumer durable (producer price index) is the lowest since 2006. Excess supply comes at a time when a trade war induced fall in consumer confidence means households are reluctant to ramp up spending even with lower prices."
The producer price index (PPI), which reflects the prices factories charge wholesalers for their products, declined 0.8 per cent in August after falling into negative territory in July.
"The bigger impact the trade war has is on confidence. It's the 'animal spirits' if you think of it that way in terms of future investments," Merian Global's Payne said. "It's not having that much of an effect " as much as Mr. Trump thinks it is " on the actual data you're seeing. It's more on confidence, the confidence of business owners to invest. The bigger concern we hear from business owners is the tightening in financial conditions."
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Even though there are concerns about China's economy slowing, Payne said the mainland Chinese economy is moving away from a manufacturing driven to a consumption-based economy. As a result, there are consumers who will pay a premium for brands, Payne said.
Two of its holdings as part of its global emerging markets equity focus strategy are Chinese sportswear maker Anta Sports Products Limited and Kweichow Moutai, the world's biggest distiller by market capitalisation.
Merian Global was formed in 2018 when its management team and funds operated by private equity firm TA Associates acquired the single-strategy investment arm of Old Mutual Global investors. The firm had US$29.8 billion in assets under management at the end of August.
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The company, within its global emerging markets equity focus strategy, invests in 35 companies at a time, with its largest investments being in Chinese technology giants Tencent Holdings and Alibaba Group Holding, China's Ping An Insurance and Indian lender HDFC Bank. Alibaba owns the South China Morning Post.
Payne said mainland Chinese companies listed in Hong Kong present greater value than A shares at the moment. "The A share premium over H shares expanded and has expanded dramatically in recent months."
As the same time, "not all emerging markets are created equally", Payne said, with Merian Global currently favouring Indonesia and Brazil.
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The firm favours companies that have strong profitability, a robust growth profile and an "economic moat" " meaning they have advantages such as a strong network of customers, a well-known brand or difficulty for customers to switch to competitors.
"We're not believers in trying to trade the news and trade macroeconomics. It is very … very difficult," he said. "What you should be focusing on is finding outstanding quality companies across the emerging world wherever they may be and paying a reasonable price for them."
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