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The EM Sell-Off Creates Opportunities for the Active Manager

John P. Calamos Sr.

Currency fears in Turkey, India, South Africa and Argentina, and escalating political uncertainty in the Ukraine are roiling the emerging markets. Investors are responding fearfully, and that fear is causing volatility, leading to more fear, and so on. This downturn may still have some distance to go.

Fear is an increase in systemic risk. It is something that needs to be monitored. At this point, we are of course concerned about the EMs' slide, but we still believe there are many reasons to invest in EMs. It's about being selective.

Although the real problems are confined to just a few countries, the sell-off has cascaded across the EMs. This isn't surprising: market participants often (over)react broadly and emotionally in response to bad news.

As we stated in our most recent economic outlook, "2014: Year of the Fundamental Investor," we expect the nearer-term prospects of emerging markets to be uneven. This creates opportunities for longer-term investors. As the dust settles (which might take a while yet), we expect investors to be more discriminating. This calmer mindset will likely rekindle interest in countries with stronger fundamentals—that is, those that aren't struggling with weak currencies, high current account deficits and fiscal deficits, or elevated levels of political uncertainty.

In fact, in the midst of this acute volatility, we continue to be select buyers of fundamentally strong companies in countries that are currently in a better position for growth. Investors who lump countries like Mexico and the Philippines in with the more troubled ones (India, Brazil) could very well be missing out. As our co-PM Nick Niziolek wrote in his recent posts, these are both countries where positive government reforms are providing an improving backdrop for private sector growth, foreign direct investment and continued economic growth. We also continue to like opportunities in more-export driven economies like Taiwan, which we believe can benefit from the developed markets' recovery.

And what about China? Overall, we're still constructive. The country is in the midst of a far-reaching shift from a manufacturing-based economy dominated by state-owned enterprises to a consumption-driven economy with greater private sector participation. This is a transition that will take time and there will be volatility (inherent in emerging markets), but the Chinese government has many resources at its disposal. The expansion of free markets in China could provide a monumental tailwind to global growth.

Finally, the secular growth themes in the emerging markets are as powerful today as they were before the sell-off. The rise of the global middle class consumer is a mega trend, and for investors who are wary of increasing direct emerging market exposure, developed market companies that provide goods and services to the emerging market consumer continue to be a compelling alternative, in my view.

As always, it pays to be selective. Emerging markets will continue to be volatile, but therein lies the opportunity for the long-term active investor.

    The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice.

    The information in this report should not be considered a recommendation to purchase or sell any particular security. The views and strategies described may not be suitable for all investors.

    As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.

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