NEW YORK — Chief executives are feeling more confident about expanding their companies’ reach into emerging markets, but portfolio managers are still wary of investing in the sector.
Some 61% of CEOs around the world view emerging markets as ripe for expansion through 2008, according to the
New York Stock Exchange CEO Report 2008, which was released Aug. 20.
Executives’ improving grasp of global markets — and a better understanding of the risk associated with them — has encouraged CEOs to look beyond their borders for growth, said Jeff Resnick, president of Opinion Research Corp. in Princeton, N.J., which conducted the survey.
“It’s almost a mandate that if you’re planning in a global environment, you need to identify new markets and favorable conditions,” he added. “It’s a matter of the way the world is evolving.”
Seventy-one percent of the survey’s more than 240 respondents characterized the United States as the most crucial area for business through 2008, followed by China (25%) and Western Europe (22%).
Approach cautiously
Amid waffling opinions on whether the European Central Bank will raise interest rates and China’s 5.6% inflation rate — a 10-year high for the nation — portfolio managers are finding ways to invest cautiously in growth overseas.
“We’ve chosen to stay in established countries with established rules and business climates, such as Western Europe or Australia,” said Michael J. Cuggino, president and chief executive of Permanent Portfolio Family of Funds Inc. in San Francisco. “Granted, some of these places have had their ups and downs, but they’re much more established than China and India.”
Growth in these countries is forcing managers to consider indirect investing as a way to reap the benefits of emerging markets while piggybacking on trusty multinational companies that are willing to take the risk of expansion, portfolio managers observed.
Similarly, 47% of the CEOs polled in the NYSE survey said they had moved operations offshore at some point, compared with 41% in 2006, and the vast majority of those who expanded abroad rated their experience as “successful.”
“Coca-Cola HBC [a soft drink bottler] is headquartered in [Maroussi, Greece], but it distributes in Russia,” said Gary N. Anderson, a chartered financial analyst and assistant portfolio manager of the UMB Scout International Fund in Kansas City, Mo. “We wouldn’t go to Russia directly, but HBC has stable records, and they’re good at what they do.”
Investing in mining companies presents another possibility for managers to take advantage of economic prosperity overseas. Commodities and raw materials are relatively safe bets, managers said.
“For equities, names that come to mind would be BHP Billiton [Ltd.] of Melbourne, Australia, and Companhia Vale do Rio Doce in Rio de Janeiro, Brazil,” Mr. Cuggino suggested.
Risky business
Success in the global markets for both asset managers and CEOs lies in understanding the risks involved, Mr. Resnick said. Steady economic growth and a calm political atmosphere are what managers are looking for when they make their international picks.
“Gross domestic product figures are very favorable in emerging markets, especially in the Pacific Rim, which is growing at 4% to 6%,” Mr. Anderson said. “But the political system in nations like South Korea and Thailand has us nervous, so we’re looking at other opportunities as the economy unfolds.” Brazil has a stable economy and strong currency, two attributes that he and lead portfolio manager James L. Moffett look for, he said.
“We don’t have a very conservative style here, but we’ll only go as high as 15% when it comes to allocating to emerging markets,” Mr. Anderson added. “Currently, we’re at 10%, which reflects some of our concern over the world outlook, but I can see pushing that up” another 1 or 2 percentage points.
Describing his own style as one that’s “less risky,” Mr. Cuggino said that he considered Swiss government bonds, as well as other Western European securities, to be safer ground due to their region’s structured securities markets and political stability.
“This kind of investing is in vogue for a lot of people, but we prefer to do it through other companies or depositary receipts,” he said. But he expects this to improve as the global markets become more intertwined.
Mr. Resnick agrees. “With the regions of the world expanding, next year, you’ll see more of a move to a global environment,” he said. “Globalization is now a core part of the market’s fabric.”
