In his first major speech as Prime Minister last month, David Cameron called on UK plc to spread its wings and look to emerging markets for profits and growth.
Cameron said: “One of the best things we could do for the British economy today is break down the barriers to trade. I am keen to seek out other opportunities to open up markets. The UK exports more to Ireland than to Brazil, Russia, India and China combined, so the scope for future expansion is simply enormous if we could get the right trading framework in place.”
A big proportion of the earnings of the FTSE 100 already comes from overseas but such a move could open opportunities for more small and mid-cap companies looking for new markets away from low growth expected in the UK and Europe.
Skandia Investment Group senior fund manager Ryan Hughes says there are numerous examples of UK stocks thriving thanks to their exposure to buoyant emerging markets. He says there are opportunities on the FTSE 250 and Aim list to take advantage of far-off growth and profit.
He says: “Stockmarket listings are just that – they are no guide to what countries they operate in. Commodities are a classic emerging markets play and in the mid caps, engineering is another good example. There are UK managers running UK funds that are buying in stocks with the sole premise that they are getting exposure to the emerging markets consumer and the emerging markets economies.”
According to Ernst & Young, the UK is the biggest exporter to Europe but with its debt problems and the prospect of stagflation or even deflation, there could be more opportunities for smaller UK firms to ignore the continent and move beyond the Western world.
Ignis smaller companies fund manager David Clarke agrees that this could be one opportunity for mid and small-cap funds. He says: “It is perfectly reasonable to assume that some firms may not want to be involved in Europe and will want to look further afield.”
Chelsea Financial Services managing director Darius McDermott says finding exposure to emerging markets through UK funds may also be a less risky alternative to full exposure to newer economies. He says: “If you are a company that’s selling to emerging markets, then that is a way in but with more robust corporate governance. I am not saying one option is better than the other but I would expect UK investment to be safer and hence a lower risk and I would expect returns to be better on that.”
Cameron: ’One of the best things we cando for the economy is break down barriers to trade’
Of course, by diluting exposure, investment returns are also diluted.
Hughes says: “You might get diluted rewards from investing through the UK but that might be a risk/reward trade you are willing to take.”
Hughes says as well as avoiding poor corporate governance practices, investing in emerging markets via UK plc means you can hedge currency risk.
He says: “We are seeing big currency moves this year, with all of the problems faced by the global economy. If you are not hedging your position, currency could significantly dilute or indeed enhance your return, so you have to take a currency view when assessing foreign exposures.”
But it is not only UK-based firms with emerging markets exposure that are of interest to UK fund managers.
Standard Life Investments UK smaller companies fund manager Harry Nimmo says: “The London market has become the market of choice for listing. It is seen as a respectable place from which companies can finance themselves effectively and that is certainly a benefit from a UK fund over an emerging markets fund.”
Within the UK equity markets, there are a host of foreign firms which are based and do business just about everywhere except the UK. Nimmo says he has investment in Russian, Indian, Jordanian and even Papua New Guinean firms, all of whom are UK-listed.
Nimmo says: “You can get some pretty interesting emerging markets exposure through the UK market. I run a bottom-up fund but roughly 15 per cent is in emerging markets, almost completely in terms of their business.”
Clarke says a push towards more UK involvement in other economies, coupled with the continued strength of London as a financial hub, will mean there will be increased opportunity to glean exposure to growing markets through UK investment.
He says: “In time, all these things are up for grabs and I think there will be more opportunities in the next five years.”
But Clarke warns that simply doing business in a burgeoning economy does not automatically mean investment success.
He says: “It is a tricky thing for investors to get involved in emerging markets – you cannot expect every UK firm that is opening up into emerging markets to have a really sound plan. As ever in investments, you have to kiss a lot of frogs before you find your prince.”