Sentiment toward emerging markets, particularly the Asia component, has been heating up this year. Barings, for example, has upped exposure to emerging markets, as have Blackrock, Lombard Odier and Deutsche Asset Management. Wells Fargo Asset Management believes concerns about China, the heavyweight in the EM asset class, are overstated.
But Reynolds has not been persuaded to take exposure to Asia.
“I’ve been pretty negative on Asia for quite a while,” said Reynolds. “Post-global financial crisis, the way we began to see things was to be very focused on fundamentals.
“We asked ourselves, if we had to put all our savings in one market for 10 years which would we choose? Generally, the definitive answer for everyone on the asset management team was the US.
“It’s a country with the same landmass as China and it has enormous natural resources but about a third of the population of China. There’s enormous scope to grow the population without any massive impact on resources – Americans can go on growing the population with hardly any stress.
"China’s financial system is very fragmented but the state-owned entities are told where they should and shouldn’t be lending. It’s an issue"
“Also, if you look at current ratios against current liabilities, in the US for every dollar of debt due they have $1.40 to pay it, but in China it’s less than $1.”
Hand in hand with the positive view on the US, Reynolds said he “never bought fully into the Chinese dream”, in part because the Chinese growth story is so heavily reliant on investment, which he believes is unsustainable in the long term.
“I also felt there was a massive issue with Chinese banks,” Reynolds added. “China’s financial system is very fragmented but the state-owned entities are told where they should and shouldn’t be lending. It’s an issue.”
Reynolds said one event that could influence the firm to look outside the US for exposure is “a strong rise in American share prices making US equity fundamentals less competitive than elsewhere”. But he added, “we are nowhere near this yet".
Another event would be “a dramatic improvement in the fundamentals of other developed and emerging market equities” that provides relatively more attractive investment opportunities than the US market.
India an exception
Despite his negativity on Asia generally, Reynolds said he is warming to India, although so far the firm has no exposure there.
“There are good reasons to like India,” he said. “Fundamentally it’s a democracy and it doesn’t have the same overinvestment that China has.
“An emerging economy that is quite service-oriented has a unique advantage – unlike Brazil or Russia, it doesn’t rely on the export of commodities so falling prices are good for India.”
In addition, earlier this month, the Indian government passed the Goods and Services Tax bill, which has been hailed as a landmark for business and is expected to boost equity markets
However, the firm is examining the Indian market this year and it will be next year before he makes a decision on committing capital, he said.