Ventre, has a bullish outlook on emerging markets, particularly China, and recently told FE Trustnet he was upping his exposure to Chinese equities.
However, he says investors are in danger of being over exposed to the volatility in the asset class by holding several different assets which are all fundamentally exposed to this story.
“If you took your view whether you are bullish or bearish on all these assets within your portfolio you would end up taking a really big bet and losing diversification,” he said.
Here he outlines which investments all give a similar bet on the performance of emerging markets, particularly China.
Equities
Exposure to domestic stocks in emerging markets is difficult due to the unique country specific rules.
However, investors can track an index using an exchange traded fund – ETF – which closely makes the return of an index such as the MSCI Emerging Markets.
Performance of indices since 22 May 2013
Source: FE Analytics
Ventre says another way would be for investors to buy UK equities with a focus toward emerging markets such as UK luxury goods companies or UK large caps.
“The big disparity between UK mid caps and UK large caps has been partly about the UK domestic story but also partly about the nervousness about global growth, emerging market growth particularly China,” he said.
Since emerging markets began to sell-off last year the FTSE 100 and FTSE 250 have both made and lost money at the same times, according to our data.
Performance of indices since 22 May 2013
Source: FE Analytics
Large cap and luxury stocks such as Diageo and Mulberry have also seen their stock movements track the performance of the MSCI Emerging Markets index.
Performance of stocks since 22 May 2013
Source: FE Analytics
Commodities
Ventre says another way to gain exposure to emerging markets would be to buy into the countries’ large appetite for commodities.
This could be done by holding stocks in commodity producing companies such as miners or by holding an exchange traded fund that follows a commodities market, Ventre says.
Performance of index since 22 May 2013
Source: FE Analytics
US Treasuries
Another route to exposure that investors may not realise is by holding US government debt.
“China owns an enormous number of US treasuries. If the country had a crisis to deal with they would effectively be forced to sell those assets to bring the money back home to fix the problem,” Ventre said.
He says this would mean the value of US government debt would fall as yields rose, Ventre said.
Since the financial crisis the prices of five year US Treasury Bills have remained high compared to their pre-crisis levels.
However, this could be reversed were China to need to sell them in the event of their own crisis.
Performance of index over 7yrs
Source: FE Analytics
Ventre says the golden rule of active management is to make small bets often and not just make one or two infrequent bets on a macro view.”
“This is particularly important for investors because the truth is we are not nearly as clever as we think we are. That includes me.”
“A behavioural experiment on dices payers found that when they bet on high numbers they rolled than harder than when they bet low numbers.”
“There is an inbuilt believe we can control random events, but we can’t and won’t always get things right.”
Currency
One of the simplest ways would be to hold a particular currency such as the Chinese Renimbi, Ventre says.
This could be done via an exchange traded fund or by holding the currency in cash.