Emerging Markets Should Fire Their PR Firms
March 10, 2014
As I scroll through Bloomberg headlines on emerging market (EM) crises and analyze recent events with my colleagues, it has dawned on me that if the EMs had public relations firms, it would be time to fire them. Focusing only on the headlines, you'd believe there is nothing great happening in EMs today, but our team has identified many EM companies with attractive growth theses.
While it may be wishful thinking that articles reporting "Macau gross gaming revenues up 40% year over year" or "leading Chinese mobile platform exceeds 300 million users" would appear ahead of headlines like "Crisis in Ukraine" or "Chinese Trust Default," we are looking through the headline risks to identify the bottom-up growth opportunities that we believe will continue to work in this volatile environment.
Of course, we are concerned about Ukraine. Our team is monitoring developments closely, and we have many discussions about the direct and indirect impacts of events in Eastern Europe. Fortunately for our clients, we have maintained very limited exposure to Russia and no direct exposure to Ukraine. In our investment approach, we favor countries with increasing levels of economic freedom, as economic freedom historically has been correlated with economic prosperity. Although Russia has shown some improvements in economic freedoms, we believe Moscow must do much more. Whereas the 2008 summer Olympics provided a catalyst for increased economic freedoms in China, we have not seen a similar impact from the Sochi Olympics.
Regardless of the outcome in Ukraine, Russia appears to be taking a considerable step back in terms of market sentiment, which we expect to be reflected in higher risk premiums and lower GDP growth forecasts as 2014progresses. While Russian equities continue to look "cheap," and are "cheaper" today than they were last week, we have yet to identify the near-term positive catalyst that will accelerate growth, create a re-rating, or increase market interest in them.
So, what are we positive on within emerging markets? We've previously discussed our optimism about developments in Mexico, the Philippines, China, Taiwan, and South Korea, where we've been focused on consumer and technology sectors. This optimism remains, with many strong growth companies in these countries and sectors adding value for our clients in recent months.
We're also becoming more positive about the potential for India and Indonesia. I have a trip scheduled to India later this month, which is excellent timing as elections begin on April 7. Optimism among market watchers is building about a potential partnership between Narendra Modi, a frontrunner for prime minister and Reserve Bank of India Governor Raghuram Rajan. The hope is that Modi and Rajan can push forward the reforms necessary to fuel the next leg of the Indian growth story. Already we've seen comparisons to the 1980s' Reagan–Volker partnership. Following the taper fears of last May, Rajan's aggressive rate hikes have been credited with recent declines in inflation and current account deficits. I'm looking forward to meeting business leaders in various industries as well as economic officials to get better sense of their view of the country's prospects.
In practical terms, the media is the PR firm of the EMs and firing the media is out of the question. We fully expect Chinese trust defaults and concerns about weaker EM economies to remain headline fodder. Still, we are optimistic that the news flow may transition to more positive developments (elections in India and Indonesia, for example) as we move through the year. In the meantime, we continue to identify strong growth opportunities within the EMs and believe our longer-term focus will serve our clients well.
Portfolios are actively managed and are subject to change daily. Geographic allocation statements are based on portfolio characteristics as of 2/28/14.
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.