Specifically, I have put a decent chunk of the global portfolio's resources into one of Société Générale’s stable of exchange traded funds - Lyxor MSCI Asia ex-Japan Consumer Staples (COSG), which is listed on London Stock Exchange and trades in sterling. In order to do this, I have dumped two of the portfolio's holdings - more of which later - and freed up almost 14 per cent of its capital for the developing-Asia consumer-staples index tracker.
Basically, it came down to a choice between the Lyxor exchange traded fund (ETF) and one from Deutsche Bank's range - db x-trackers MSCI EM Consumer Staples (XECS). As the name indicates, the db x-trackers fund shadows a far wider index, one that is sustained by the spending power of the new middle classes throughout the developing world.
This may be good and bad. It's good to the extent that the spending power of the middle classes of comparatively wealthy developing countries, such as Brazil and Russia, is backed by more resources and more state support in the lean times. But it's bad to the extent that some of these nations are stagnating more than they are developing and probably have little more potential for growth than the sclerotic developed world. About 45 per cent of the value of the EM Consumer Staples index is in companies from Brazil, Mexico, South Africa and Russia - countries to which I really don't want exposure.
True, the country exposure of the Lyxor COSG fund isn't ideal. The big exposures are to South Korea (21 per cent) and China (22 per cent). At purchasing-power parity, South Korea already generates per-capita output of $33,200 (£21,600). That's more than New Zealand or Italy and only $4,100 less than the UK. In other words, South Korea has moved beyond the status of 'developing' and into 'developed' - it is a rich nation.
Meanwhile, I am ambivalent about raising the global portfolio's exposure to China. Via its holding in three ETFs - Lyxor CSI 300 A shares (CSIL), ETFS Long CNY Short USD (LCNP) and within iShares MSCI Emerging Markets SmallCap (SEMS) - the fund already has 21 per cent of its capital invested in China. So, I ask, do I really want to raise that proportion to 27 per cent (as I have)? Granted, China still looks like the emerging economy of choice (see Emerging Markets: Don’t panic; 19 December 2014), but that's a heavy weighting. Yet I may be reducing it soon because the short-term performance of the CSI 300 - up 68 per cent in the past six months - looks unsustainable.
Two factors seem to be behind the tearaway rise. First, better access to Shanghai's listed equities for foreign investors, which is effectively controlled by a quota, is imminent. Second, there is the hope that the central bank must loosen monetary policy in response to forecasts of lower growth. But these can only take prices so far as - increasingly - they struggle against the dampening effects of lower expectations for medium-term growth. So a bit of profit-taking - unusual for the Bearbull Global Portfolio - might be in order.
That would also free up capital for Plan B. This entails being more fussy about which developing markets the global portfolio is invested in. Specifically, I want more exposure to India and to the so-called 'Asean 5' economies - Indonesia, Thailand, Malaysia, the Philippines and Vietnam. True, these countries won't be growing as fast as China in 2015 and beyond. Even so, most likely they will grow faster than either the world's other developing economies or the advanced Asian economies. Their mixture of growth driven by both exports and infrastructural development, sound finances and - in the case of Indonesia and Malaysia especially - better prospects for improved governance points to a promising medium term.
The trouble is I am not aware of an ETF that tracks the Asean 5, let alone those five plus India. So I may have to take a deep breath and buy six country-specific funds. That would be a drag since a key aim of the Bearbull Global Portfolio is to be as productive as possible, which means keeping dealing to a minimum. Still, if the need is sufficient.
Lastly, what about those ETFs I have dumped? First, there was iShares MSCI Emerging Markets (SEMA), which tracks an index of mostly state-controlled national champions. Too many of these are inefficient monoliths that respond to the dictates of state-sponsored patronage as much as commercial imperatives - the likes of Russia's Gazprom (OGZD), Brazil's Petrobras (BOVESPA:PETR4) and China's China Mobile (SEHK:941). I really don't want exposure to them. Nor does it help that the index's biggest component is Korea's Samsung Electronics (KOSE:A005930), which is not really a developing-markets company. Second, I sold the portfolio's stake in ETFS Brent 1 mnth (OLBP) partly on the guess that the oil price is as likely to hit $20 as it is to make $100 in the coming months, but more so on belatedly concluding that oil and emerging markets don't really mix since, in practical terms, the oil price is a geared play on emerging markets.
