EUROPE’S IMPACT ON EMERGING MARKETS
DAVID SEMPLE, PORTFOLIO MANAGER: Greece, in and of itself, is not a particularly big issue for emerging markets. Of course, the disorderly disintegration of the Eurozone is a very big issue, and there will be collateral damage, that is likely to be quite widespread and disproportionate in places. But we believe the emerging markets sector is in relatively good shape. It's got low government debt, low consumer debt, and low corporate debt. Valuations are much better now than they were before the global financial crisis. I'm not saying that it’s immune; I'm just saying that it’s in better shape to start off with. Now, it's a long-tail risk, and we think that there is a good opportunity that the Eurozone stays together. However, we think that in the interim period there will be a lot of volatility, and we want to have a little extra cash on hand to pick up the opportunities; to make investments in some of the companies that we find really compelling, whose business model we love, at good prices. That's our current approach.
It's hard to identify specific countries that can really capitalize on some of the Eurozone issues because, basically, every country is impacted. Eurozone aggregate demand is likely to go down, and the Eurozone is a large trading partner of every country around the world. It’s difficult to be isolated from the impact. Having said that, some countries are obviously in a better or worse place. The peripheral European countries that are in the ex-Russian hemisphere (the old Eastern European countries), are very tied-in in many respects in terms of financing and trade with Western Europe, and they might find it very difficult. The larger countries that are more domestically-oriented (Brazil, Russia, India, China) and that have big populations are likely to have some degree of insulation from what is going on. But no one is isolated, and we're watching the situation very carefully.
I think there are two interesting things going on within the emerging markets asset class. The valuations of quality stocks versus risky stocks are at an extremely high level. There's a real disparity there, and you have to believe that something's going to change materially and fundamentally for that to prevail over the long run. And for some of the countries that are perhaps a little bit more isolated from what's going on in Europe, such as the Southeast Asian countries of Thailand, Indonesia, and Philippines, their valuations relative to the rest are not exactly a giveaway. That means it is a little bit harder to put incremental money to work in these countries. But it still feels difficult to wholeheartedly commit to the more risky emerging markets. We're very cognizant of these dislocations, so we have reduced our consumer staples, in particular, because we think valuations are perhaps too high. As you know, we approach the asset class seeking growth at a reasonable price. We like to have the reasonable price component as well, and we think some of these stocks are a little expensive right now in relative terms.
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