Thoughts From Southern Europe & Emerging Markets

Table of Contents

Those of us who know Ursula and I well will know we spend August in our house in Crete, the most southerly point of Europe and the largest of the Greek Islands. We bought the acre of land here in 1999 with an awful lot of Greek Drachma, which did not cost very many pounds and just before Greece joined the European Union and adopted the Euro. We are not sure if the house and gardens will ever truly be finished, nor whether we or the local and enduring goat herd actually own this bit of hillside, but we have been holidaying here since 2003, now 20 years.

Every year there are changes, but also constancies – the weather in August is very reliable, in the early 30’s every day, every year we get a few clouds for half a day or so and some years an hour or two of downpouring rain, not this year.

New roads were built after joining the Euro zone on Euro zone grants, this continues, the journey time from the north to south coast used to be a day, now it’s just a couple of hours. The Athens Olympics of 2004 brought at huge buzz to Greece, its stock market boomed, and real estate values shot up. Then came the financial crisis, Greece suffered more than most and from an exciting emerging European economy became one of the PIGS. Portugal, Ireland, Greece and Spain, all clinging to stay in the Euro and suffering big recessions and debt overhangs.

Fourteen years later Greece is recovering and, in some sectors, starting to catch up. The real estate market has bottomed, and prices are rising in some areas. Tourism looks fully recovered, and a quick look at the local airport online arrivals board shows new visitors from Hungary, Serbia and Romania all enjoying Mediterranean holidays as well as the more traditional visitors from England, Germany, France, Italy and Scandinavia. We have even heard older US tourists this year as opposed to the youngsters working at the local NATO base, who are ever present.

Apart from the new accents the big change this year is in banking.

Not so long ago the production of a credit card to pay for anything other than a Hertz car rental at the airport was met with a quizzical look and the Greek for No…..Oxi! Pronounced Oshi in Crete. This year we have been surprised at the catch-up pace with most supermarkets, restaurants, beach bars and shops expecting you to present a contactless card or phone. This is a major breakthrough for a country and economy which has struggled with its black economy and getting anyone to pay tax. Sales tax at least is now being recorded and collected efficiently on a much bigger volume of financial transactions.

It also got us to reflect on our banking experience over the now 20 years of owning property here. Banking was top of the list of headaches. A trip to a Greek bank was rarely less than a half day affair and the paperwork, queues and departments were straight out of the Dicken’s Circumlocution Office, a complete nightmare.

For several years after the financial crisis it felt quite risky having more than a few 100 Euros in any Greek banks for fear of a bank collapse. Then sometime around 2011/12 at the peak of the European debt crisis we saw several hundred Euros frozen in our Greek bank account. We had inadvertently been recorded as Greek tax residents and owed tax! The amount supposedly owed was frozen in our account by the Greek tax authorities, and we think HMRC can be tough!

For several years we bought Euros in London and flew out with cash tucked in different pockets and bits of luggage to last a month and settle debts like the water bill. The local regional utility ran on cash with locals queuing up with rolls of cash straight from Taverna income to pay their water bills.

How much cash ended up in the right hands and how much tax was paid we can only guess and imagine.

This has all changed in the last couple of years. There has been consolidation in Greek banks, balance sheets are repaired, online banking works and whilst we have been here Piraeus Financial now our Greek bank has launched its new online app. There was no question of cash at the utility office to pay the water bill, a card was expected and accepted.

Then a series of coincidences. A conversation with a young local entrepreneur got on to the Greek stock market, its rising again from the ashes. The Greek market index is up 65% in the last 12 months having fallen by around 80% since its last peak in 2008 before the financial crisis. A quick look at the Index constituents showed Piraeus Financial as its 6th biggest holding. Then a conversation this morning with our Investment Director Nick Gait. Nick has been stalking a new emerging market fund for several months as is his way before he will bring it to the investment committee for review. “Funny you should mention Piraeus Financial James, it’s the fund’s biggest contributor over 12 months.”

Turns out Greek banking stocks are still very cheap with values around 6 times earnings, Piraeus Financials profits are growing by 25% p.a. as it cashes in on a key theme that this fund follows in a number of countries – new banking customers. It turns out 1.7bn people in these emerging economies still don’t have bank accounts, that’s about 20% of the world’s population.

Food for thought!

Tideway Asia Pacific and Emerging Market Exposure:

Despite market volatility, multi-asset portfolios have continued to perform well in relative terms, with our continued short duration positioning and credit selection from our fixed income managers driving returns as highlighted in our previous bi-weekly communication.

Alternatives, which we have also discussed at length continue to provide a headwind to relative returns as market continues to price Real Assets (Infrastructure and Real Estate) as bond proxies not giving much credit to the built in inflation linkage associated with these assets; Inflation as we still know is relatively high globally and ahead of interest rates in UK. Today, however we will turn our attention to our Equity allocation, our overall positioning with a particular focus to Asia and Emerging Markets.

Equity Portfolio positioning:

Region Tideway Equity Portfolio Ishares MSCI ACWI +/-
Western Europe 20.2% 10.9% +9.3%
UK 10.4% 2.7% +7.6%
Asia Pacific 19.6% 15.0% +4.6%
Central Asia 2.4% 1.5% +0.9%
LATAM 0.7% 0.38% -0.1%
Africa/Middle East 0.9% 1.3% -0.4%
North America 45.6% 67.5% -21.9%
Source: Tideway – NB that Estimates based on most recent available data from fund managers.

As a reminder Tideway’s portfolio positioning is very flexible with Global managers, who have the mandate to seek the best possible opportunities from around the world, forming the core of the portfolio, with Tideway’s regional allocations changing as and when these managers make changes to their portfolios. Individual country or regional funds are then selected to top up allocations in line with Tideway Investment Committee views.

Year to date our country allocations have acted as a headwind to relative performance with the US driven by the tech and AI rally leading the way. Despite this rally we feel comfortable with our positioning with expensive valuations in the US the primary driver of our underweight position.

Furthermore, as the table above shows, one area which we are excited about our allocation to Asia Pacific and Emerging Markets where we have a roughly 5.5% overweight positioning compared to the Ishares MSCI All Countries World Index.

As Chris Tennant a member of Fidelity’s Emerging markets team points out:
‘Companies in emerging markets are at record cheap valuations, their lowest versus developed markets since 2002.’

If cheap valuations alone are not enticing enough, Fidelity’s estimates for next year indicate that the ‘emerging market index could see better net income growth, sales growth, and return on invested capital than the global index, as well as lower levels of debt.’

Furthermore Larry Brainard, Chief EM Economist at TS Lombard has recently upgraded overall EM risk:

‘China’s slowdown is starting to bottom out driving a less negative EM risk view. US rate markets are pricing the end of tightening as margins start to improve. We cautiously revise our overall EM risk call to moderate positive.’

There has been a lot of negative press surrounding China with economic data continuing to underwhelm and the continued turmoil of the China property sector. It should be noted however that China is by no means our largest weighting in the region. Our Asia and Emerging Markets exposure is diversified with a combined allocation to China and Hong Kong a just 3.6%, broadly in line with the index. These allocations are exceeded by Japan (5%), and well as being closely followed by Australia (3.2%) and Taiwan (3.1%) with the majority of the exposure represented by Taiwan Semiconductor Manufacturing Company which is held by all three of our Asian and Emerging Market funds, as well as also being represented in our Global mandates.

Country / Region (Top Position) Tideway Equity Portfolio Ishares MSCI ACWI (%) +/- (%)
Japan 5.0% 5.5% -0.5%
Australia 3.2% 1.9% 1.3%
Taiwan 3.1% 1.5% 1.6%
South Korea 2.3% 1.3% 1.0%
China 2.3% 3.2% -0.9%
India 2.3% 1.5% 0.80%
Singapore 1.6% 0.4% 1.2%
Hong Kong 1.3% 0.5% 0.8%
Source: Tideway – NB that Estimates based on most recent available data from fund managers.

Source: Tideway – NB that Estimates based on most recent available data from fund managers.

In addition to cheap valuations and improving macro sentiment we also believe our managers will be able to continue outperforming their respective benchmarks through stock selection and prudent allocation between the distinct regions on offer with all three managers analysing macroeconomic data when constructing their portfolios.

Over the last five years each of our managers have underperformed their benchmark only once over a calendar year including healthy positive relative returns for all managers in 2023. Although past performance is not a guide to future returns, we believe through well-established investment processes and the significant resources at their disposal that this trend should continue.

Fund Benchmark 2023 (Realtive) 2022 (Relative) 2021 (Relative) 2020 (Relative) 2019 (Relative)
Jupiter Asian Income FTS AW Asia Pacific Ex Japan +2.46% +10.78% +12.0% +12.6% +5.3
Fidelity Asia Pacific Opoortunities MSCI AC Asia Pacific ex Japan +3.22% -4.43% +15.1% +6.9% +11.1%
BlackRock Emerging Markets MSCI Emerging Markets +2.05% -8.84% +0.75% +5.67% +8.20%
Source: FE Analytics 01/09/2023


      • Underweight US and AI related stocks main headwind year to date

      • Historically cheap valuations in Emerging Markets and improving fundamental data act as a good starting point for future returns.

      • History of Tideway selected fund manager outperformance.

    The content of this document is for information purposes only and should not be construed as financial advice. Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed