Investment opportunities where old and new economies collide

Rockies road: Canada has a resource-heavy economy which has been hit by the fall in oil prices.
Rockies road: Canada has a resource-heavy economy which has been hit by the fall in oil prices.
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Tomorrow is Commonwealth Day and an opportunity for investors to consider the 53 independent sovereign states which form this key association. Sharing values which stem from former membership of the British Empire, there are many with exciting growth potential.

Whilst the 15th century term “commonwealth” indicated ‘public welfare’, the original phrase meant ‘wealth’. It is a term still used in the title of four US states such as Kentucky and Virginia.

The Commonwealth of Nations was formed in 1949 and covers almost a quarter of the world land area with nearly one-third of the global population. It is responsible for 17 per cent of gross world product. By population, its members range from India with 1.26 billion to Tuvalu with just 10,000 living on nine islands in the South Pacific.

Financial advisers stress the importance of diversity for successful investing. This might be by sector and fund manager but certainly by geographical spread.

Adding some key Commonwealth states to a portfolio is a sure way to gain a wider global presence away from the headline grabbing economies of the US, Europe and Japan. Instead there is “a mix of economies from the old world and some impressive new world opportunities”, says Adrian Lowcock of AXA Wealth.

It is amazing that no fund has yet been created which offers such an opportunity. In economic terms, there is a good cross-section from advanced markets like Canada and developing ones such as Singapore to emerging nations like India. Often these countries have young, aspirational populations that are increasingly well educated.

Yet investors need to be aware of the risks, particularly a reliance on commodities, notably in Australia and South Africa.

Nicola Loudon, investment manager at broker Charles Stanley in Leeds, says country specific investment trusts are the best route. She is positive on India but not on Australia on account of its commodity and currency weakness.

In addition to single country collectives, an index tracker – such as exchange traded fund or ETF – can be used. Examples include db X-Trackers MSCI India and HSBC MSCI South Africa. Whilst low cost, check if actual shares are purchased or a synthetic approach to simulate holdings which can bring additional risk.

Canada’s stock market is focused on three sectors: banks (42 per cent), energy (20 per cent) and basic materials (nine per cent). It is a resource-heavy economy which has been hit hard by the fall in oil prices.

Stimulus measures should become evident, following the first post-election budget this month. Avoid a North American fund as the US will dominate. It can be accessed through an ETF like HSBC MSCI Canada. The IMF forecasts Canadian growth of two per cent this year and 2.2 per cent next, which is the same for the UK.

Martin Payne, from wealth manager Brewin Dolphin in Leeds, tips Middlefield Canadian Income, an £80m investment trust which yields 6.7 per cent. For a wider view, he also likes iShares MSCI Canada which has 40 per cent in financials and 20 per cent in energy-related stocks.

India is the most accessible non-UK Commonwealth country for an investment, both as a single country fund and forming a sizeable holding in many Asian and emerging market collectives. Pacific Assets Trust, managed by Stewart Investors, for instance, has 33.4 per cent of its portfolio in India plus some other Commonwealth states: Bangladesh with 2.9 per cent and Sri Lanka 2.9 per cent.

India will overtake China this year as the emerging market star performer. It is a net beneficiary of low energy prices. Poor infrastructure has been a long-term impediment to economic development but major reforms have been achieved under the controversial but business-friendly BJP-led government. The IMF forecasts growth rising from 7.5 per cent in 2016 to 7.6 per cent next year.

Its stock market grew around 30 per cent in 2014 but was negative last year although still outperforming global markets. Of the many funds available, Darius McDermott from Chelsea Financial Services tips Goldman Sachs India Equity Portfolio.

Africa has many Commonwealth nations but the majority are economically small and are frontier rather than emerging markets. “African countries have leapfrogged developed economies in many instances as they were early adapters of technology, such as mobile payments,” says Lowcock.

As a warning sign, Barclays last week announced it was pulling out of Africa after over a century. Its chief executive, Jes Staley, said it was a “very difficult decision” but revealed the bank took 100 per cent of the liabilities but only 62 per cent of earnings which “makes it structurally invalid”.

It operates in 12 African countries and values the business at £3.5bn, yielding a £979m profit in 2015.

The South African economy is “not in good shape at all and is a no-go zone for investors”, warns Jason Hollands of advisers Tilney Bestinvest. The country’s finance minister, Pravin Gordhan, recently described its economy as “in crisis”. Long regarded as the regional superpower, South Africa suffers from poor governance, resisting denationalisation and ignoring corruption.

Excessive interference by the government in the corporate environment makes it difficult for international investors to be comfortable taking large positions. South Africa is the world’s largest exporter of platinum, demand for which has reduced in line with other hard metals, although stocks are currently trading around the country’s long-term average.

Concern though over global commodity prices, accompanied by the collapse in the rand, is a warning bell.

If looking for an investment across the continent, McDermott has identified Alquity Africa.

Australasia is “one developed region often overlooked by global investors”, says McDermott.

Whilst the benchmark ASX 200 Index is heavily weighted towards materials and energy, he says, “a bottom-up approach to stock picking will find good quality companies at quite attractive valuations across sectors including infrastructure, general insurance, telecommunications, listed property and healthcare”.

For funds where the Australasian holding is over 20 per cent, McDermott suggests Schroder Asian Income and the recently launched Jupiter Asian Income. They also have exposure to other Asian Commonwealth states.

Newton Asian Income with 37 per cent directly invested in Australia, yielding five per cent, is tipped by Payne. For an ETF, there is the Lyxor Australia S&P ASX 200. However, the country’s close links with China as a major purchaser of its commodities has knocked its shares.

New Zealand has just seven stocks in the MSCI New Zealand Index of which three are energy companies. It remains a market that is not easily accessible for UK private investors.

Too many investors focus on political and economic agreements, such as the EU, rather than on international trade. Selecting key Common-wealth states could be a winning strategy but more for the long-term and therefore ideal for children and those building up a pension with a decade or more to go.

Conal Gregory is Headline Money Regional Journalist of the Year.