Investment Outlook - Global Opportunities
Emerging Markets: Brazil, China—and Pakistan?
What was behind the huge runup in emerging markets in 2009?
With the subprime shock, everybody was looking for safety. And for some strange reason, they thought the U.S. dollar was safe and went into money market funds until January or February of 2009. Then people began to wake up to a few things. One was that the supply of currency would at some time outpace demand, so value would decrease. In China there was 21% growth of money supply, and in the U.S. 18% to 20%. That created this incredible liquidity looking for a home as people woke up [to the fact] that they should think about inflation coming down the pike. They weren't getting any yield on dollar deposits, so equities were the obvious answer.
Have emerging markets moved too far too fast?
The percentage increases are a bit misleading because you are coming from a low base. We are only halfway toward the previous high of 1997. Have we gone too far? The only measure we have is valuations, and probably the best single measure is price-to-book value ratio. [Book value is a measure analysts use to estimate what a share of stock would be worth if all the company's tangible assets—factories, real estate, and so on—were liquidated.] If you look at the average price-to-book ratio based on the stocks in the MSCI Emerging Markets Index, we are only halfway to the 1997 high. The absolute high was three times book, the low was one times book, and now we are at two times book, roughly.
Could things reverse course?
You better believe there are a lot of hedge funds out there betting against this rally. That provides more volatility. It's a self-feeding situation. You have to be aware that the volatility will be there and there is nothing you can do about it.
Apart from all the money in the system, what is driving the emerging-market rally?
Fundamentals. If you look at any time period—10 years, 3 years, 1 year—emerging markets have outperformed U.S. and global markets. Their economies are growing faster, four times faster. And during the 1997-1998 Asian crisis [policymakers in] emerging markets realized they needed strong balance sheets at the national and company level and had to build up foreign reserves, which they've done. They were building up reserves, keeping their currencies low, and reducing debt. Their debt-to-gross-domestic-product levels are way below developed markets, and when you look at the foreign exchange picture, it's even more impressive. Russia has $400 billion in reserves; China, $2 trillion. So where do you want to put your money? Obviously, emerging markets are the place.
How did the panic caused by property developer Dubai World's debt woes affect the appetite for emerging-market stocks?
There was some retreat, but it was very short-lived. Dubai keeps on tanking because of uncertainty. Emerging markets hardly missed a beat.
What markets are you keen on?
Brazil and China. Our funds are big, so obviously we want to be in a place where there is good liquidity. But we are also looking at many other markets. We have a frontier-markets fund that we launched about a year ago—we have one fund in the U.S., one in Europe, and one in Korea. Korean investors have become quite global.
What new markets have you entered?
Well, I was just in Libya and Algeria, though it will be a while before we [invest] there. I am speaking to you from Doha in Qatar, then I'm on to Jordan, Lebanon, and Saudi Arabia and back to Dubai. We are investing in all those countries. There is money coming into our funds, and we see opportunities. Obviously with the high degree of uncertainty, you see an overreaction in Dubai [so there are buying opportunities]. Qatar has gas exports taking off, and it's going to have a lot of money to invest. They are building this incredible infrastructure and investing in technology. We are investing in Qatar Steel and Qatar National Bank. In Dubai, we are investing in Emaar Properties and DB World, the ports company.
We continue to hold on and buy in India. In Pakistan, we are probably overweight compared with everyone else. For our Asia growth funds, we have been buying Pakistan Telecom, MCB Bank, and Indus Motor, which is a Toyota (TM) assembler and distributor. In Iraq, we haven't gone in yet. We have a private equity fund looking at it as well. There is a stock exchange, by the way. And Iran has a big market. When and if things get better, that would be an obvious place to hit.
What themes are you investing around?
Commodities are a main theme. We are looking at $70 per barrel in our model. Another theme is consumers, because the per capita income of consumers in emerging markets is going up. We hold retail chain Massmart from South Africa, which is beginning to move north to other countries. In Kenya, [we hold] East African Breweries. As for telcos, we find them expensive and think the chances of growth are diminishing. It's a bit like the airline industry. You have to keep on investing and buying expensive licenses where the government takes you for a ride.
How do you expect emerging markets to perform in 2010?
You cannot expect the same kind of percentage increases, but that doesn't mean you can't have a very good return. We are not in the mode of selling massively or getting into cash, that's for sure. That's probably the consensus opinion, which is usually dangerous. But we are finding companies with good dividend yields, companies that are growing.