Creating a ‘beta-beating’ global portfolio

Robert Gensler

The effects of the sub-prime mortgage crisis on global equities could be offset by the rapid growth and development of emerging markets, according to T Rowe Price’s London-based head of global equities Robert Gensler.

Speaking at a breakfast seminar hosted by T Rowe Price and Van Eyk Research in Sydney yesterday, Gensler did not attempt to underplay the significant and continuing effects of massive debts in the US sub-prime mortgage market, but rather stressed that portfolio managers need to put things in a (global) perspective.

“You have to ask yourself what’s more important: that the US market is slow or that emerging markets, particular China, are strong? Yesterday’s growth is tomorrow’s road-kill and vice versa.”

Gensler emphasised global equities are in a period of moderating growth, following an extraordinary “dream run”.

“There’s dynamic change in every sub-sector of the economy right now. Growth is slowing, so you have to be a bit of a stock jockey. You have to pick your stocks carefully.”

He pointed out that emerging markets now comprise about 27 per cent of the global GDP and are expected to contribute to 45 per cent of this year’s global GDP growth.

“Basically, China’s going to put on more dollars than the US,” he said.

Although emerging markets, such as China and India, have seen rapid rises only to come crashing down again, Gensler said he believes things really are different this time.

“The surplus in these [emerging] markets is why it’s different. The growth is self-funded this time, whereas in the past it was foreign-funded. These countries are repaying, or have already repaid, their foreign debt, so you don’t have liabilities this time, you have surplus.”

European markets are also doing well, he said, particularly Germany, which is benefiting from amendments to labour laws 10 to 15 years ago as well as the mass purchase of Eastern European companies experiencing profits of between 20 and 30 per cent.

However, he said investors need to bear in mind the factors impinging, or likely to impinge, on growth in emerging markets, including inflation.

He pointed out that wages are going up in both India and China, which effectively reduces companies’ profit margins.

“And the biggest risk to the global market right now is profit margins going down.”

Gensler stressed that the five key factors to generating global equity alpha are allowing a single decision-maker to run the portfolio, researching global equity markets well, selecting a broad range of stocks across developed and emerging markets and a wide capitalisation rage, not aligning portfolios too closely with the index and managing risk effectively.