Alanna Petroff: We just wrapped up our sixth annual Morningstar Investment Conference where emerging markets, and specifically China, was a big focus for many of the speakers and attendees. An expert in China is Philip Ehrmann from Jupiter. I got to sit down with him individually and speak with him about the most compelling industries right now in China and here is what he had to say.
Philip Ehrmann: Our focus is really to look at those areas that are deemed to be the building blocks that will allow China’s economy to continue to grow at a high rate in a sustainable fashion. We are not actually trying to reinvent the wheel here. We are very much following what the government has identified in its 12th five-year plan where they specified seven emerging strategic industries, which at the moment only account for about 3% of economic activity, but they see as becoming very major elements over the next 5 and 10 years, amounting to as much as 15% by 2020. Those industries will cover things like fuel efficiency, improved environmental activities, they'll relate to healthcare and education.
So, things that we are very familiar with and have seen in not only other emerging economies, but we take for granted in our own culture and economy. So, these are the areas that we built into an already quite diversified portfolio to provide us with the factors that are going to give us the growth in the Chinese corporate sector going forward.
Petroff: But then, of course, there are some areas in China that you might not want to touch at all, so tell me about those areas?
Ehrmann: Well, there tend to be ones where China doesn’t have a demonstrable advantage. Either China doesn’t have an edge in terms of the resource: I think, particularly in terms of natural resources, where places like Brazil and Australia will fare much better. But, also
labour-intensive industries, where margins tend to be low. And with rising incomes in China - which are driving many of the consumer sectors that we like - with rising incomes, margins are being compressed and profitability is being eroded. So, it would be things like textiles, ship building, lot of the big metal-banging, metal-crunching industries. Those will be the ones we'd avoid.
Petroff: In terms of how an individual investor could access the Chinese market, and still be able to sleep at night... what would you recommend?
Ehrmann: Well, as you mentioned earlier on, I've been managing Chinese portfolios for the best part of 10 years and do get to sleep okay. It is a large enough country now. It is the second largest economy in the world. We can build diversified portfolios and ensure that we have good quality management running our businesses. But for those people who are just beginning to step warily into emerging markets, emerging markets funds or Asian dedicated funds can have a very significant proportion of China as part of their portfolio.
Petroff: That was Philip Ehrmann from Jupiter. And for more information see the links below this video.