Australia is more highly leveraged to emerging markets than people realise, and finding ways to diversify away from that risk is one of the biggest challenges facing portfolio managers.
Speaking at the CFA Institute's Australia Investment Conference yesterday, BT Investment Management chief executive Emilio Gonzalez said that the extent to which Australia was leveraged to emerging markets was "the biggest risk we face".
Australia had come out of the global financial crisis by slashing interest rates and riding on the coat-tails of Asian growth, he said.
"We tend to underestimate how pervasive the multiplier effect of that is in terms of dragging the Australian economy along, and the exposure that the Australian public has without actually knowing about it," Gonzalez said.
To illustrate his point, he gave the example of a worker on a BHP mining site who had bought a property in a mining town and had his super in a fund that invested in BHP and emerging markets.
"He might think: 'I've got my property, I've got my job, I've got international investment'. But there's one big factor, just like before the credit crisis when we had property boom, markets doing well, and fixed interest doing well: it's cheap money. As soon as you pull the rug out from that everything falls over," Gonzalez said.
Victorian Funds Management chief investment officer Justin Pascoe agreed, and said that diversifying away from the 'key thematic' of emerging markets was one of the things that "kept him awake at night".
Earlier in the conference, JP Morgan managing director and chairman of emerging markets, Jing Ulrich, said that a number of factors would lead to a softening in demand from China for exports to the Australian resources sector. However, Ulrich said that while China "had to contend with a lot of imbalances in the medium to long term," she did not believe there would be a hard landing for the Chinese economy.