Identifying the victors in emerging markets

Mar 10, 2014 @ 12:00 am

Runtime: 5:55

As the emerging markets picture shifts, it is more important than ever to make sure investors have the right exposure to areas of growth, according to Peter Marber of Loomis, Sayles & Co. and Teresa Kong of Matthews Asia Strategic Income Fund.

Video Transcript

[MUSIC] This week on Wealthtrack, the emerging markets are under fire as investors flee their markets and currencies during an outbreak of financial war. But this week's guests, Matthews Asia's Teresa Kong and Loomis Sayles Peter Marber, say not all emerging markets are losers. They point out the victors next on Consuelo Mack Wealthtrack. [MUSIC] Well, the emerging markets today are really so different from the emerging markets of 20 years ago. In fact, some countries have actually emerged, while several have not emerged. So maybe just to give you a personal, example. Mm-hm. My parents decided to emigrate from Hong Kong to the United States back in 1980, from Hong Kong. And back then, Hong Kong was making 60 cents for every $1 of GDP in the United States. And, of course, my parents thought, wow, U.S. is the land of opportunity. But fast forward to today, Hong Kong is actually making $1 for every dollar that the U.S. is producing in terms of GDP. So, Hong Kong is at parity. Which mean that, over the last 25 years, Hong Kong actually grew at a much greater rate than the United States. And that's a really great example of how many emerging markets have actually emerged, but nevertheless, they're still being lumped together with other markets that are still trying to emerge. So I just wanted to highlight really the heterogeneity of it. And from the investor's perspective, the key were is to make sure that you are not involved in a passive strategy, because then you will end up having a benchmark exposure, if you will, that may actually be under-allocated to the countries that are much more strong in the fundamentals. Right. And so you, you just want to be, make, make sure that you have active exposure. So it's, it's interesting cuz you, I know Theresa did told me at a, a phone conversation earlier that you should basically blow up the benchmarks. That's right. So Peter, the same question to you, is you know, what about, why, why should we ignore the indices in emerging markets? Well, I mean, first thing you have to remember, is you're talking about 85% of the world's population sort of live in emerging markets and you've got all different types of economies. You've got everything from, exporters of bananas and stuffed animals to manufacturers of pretty sophisticated medical devices and everything in-between. And what's interesting is that you've got GDPs that are a thousand or two thousand and then you've even got some countries that have GDPs per capita that are approaching 20,000, which is actually above the emerging market threshold, as defined by the world bank. And yet, they're still in the indices. And, I think if you looked at the currency indices, the bond indices, and the equity indices, what you'd find is completely different country weightings. And so. So, so you gave me, this fascinating fact, which is that in the MSCI emerging market index, which is kind of the benchmark for everyone, it is that, that 43% of the index is made up of just three countries. So China, Korea and Taiwan. So there's an example of, so you know, you, you, you're buying basically three countries when you're buying an index and you think you're spread out over all of these quote unquote emerging markets. Exactly and those three countries have relatively limited waiting in the debt indices and the currency indices so, you know, you really actually have to look at multiple indices and multiple strategies to get what I call like, the complete emerging market opportunity. But what about you know, from returns, correlations, you know all of the things that we look at as, as fixed income investors, as equity investors. So, you know, Peter, what do they offer as far as that, those other considerations investment considerations? Actually everything you just mentioned, if we look back at least, let's take from 2000 through 2013. An investor who would have diversified a portion of his bond portfolio, for example, in emerging market assets, would've probably made about 4 or 5% more per annum than they would have in just US Bonds. That's huge. And, and that's in bonds. That's in bonds. You probably would have made around 4% more in equities. And you mention correlation. Most of these markets are actually, their economies are not that correlated to those of the US and their markets are not that correlated. Being, their zigging when we're zagging. And one of the great things that we can do today as investors is invest globally in a way we couldn't do it 20 years ago. I mean, if you look at the amount of ETFs and actively managed funds for emerging markets, an individual today can globalize their portfolio the way some of the largest pension schemes in the country can. It used to be only in institutional investors could really globalize their portfolios, but now individuals can do the same thing. So there's been a great equalizer in your investment opportunities but that also means that you've really gotta know what you're doing. Tracy, one of the things about the emerging markets that everyone talks about that their volatility. So, how much of a concern is that, when we, when we consider investing in emerging markets? Certainly volatility is a concern if you're investing for one year but I think most of us have a much longer term investment horizon. And in that, from that perspective, it really does make sense to diversify, and emerging market equities have actually proven to produce good returns over the long run. There is reversions of the mean, so if you have the 3 to 5 year investment horizon, most likely this is not a bad entry point into immersion markets, especially into Asia equities. [MUSIC]

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