Emerging Markets Have Lagged Developed Markets
DAVID SEMPLE: It's true
that emerging markets have had a disappointing performance relative to
developed markets, although in absolute terms maybe they're not quite as bad.
I think there are a number of reasons for this, not least of which the U.S.
economy seems to be picking up. Europe may be getting better. Japan has
obviously had some significant changes.
Within emerging markets, there are some
significant things going on. I think there's a lot of skepticism on China.
I think a lot of that is misplaced. There's also the strength of the U.S.
dollar, which tends to be unhelpful for emerging markets. But one of the
other reasons, which people who are perhaps not intimately involved with
emerging markets should realize, is that corporates have failed to deliver
the EPS [earnings per share] growth which is in line with the GDP growth,
which has been superior in emerging markets. That has been a
disappointment over the last couple of years.
Using the GARP
Our strategy is focused on bottom-up. There are a lot of companies in emerging
markets that have done well. But that's really a function of just being there.
If you're in an economy that's growing fast, you don't have to be that good to
really do well. We focus on meeting management and assessing the management
and the business philosophy -- the DNA of the company. It's very important in
There are some companies which actually
do very well within emerging markets and are efficiently run. There are also a
lot that are not; many state-owned enterprises for instance, are not
particularly strongly run. When we find a company that can really talk about
managing its capital effectively, managing its costs effectively, then it's
very refreshing for us and those are the kinds of companies we seek
Obviously the environment has been fairly challenging for many of these
companies, but we think we can find stocks that will thrive nevertheless. Our
strategy focuses on structural growth at a reasonable price. I can give you
a couple of examples.
example is a company called Tiangong in China. It makes high-speed steel.
Amongst other things, it's used for drill bits. Tiangong is a company that
has made very good use of the fact that China actually mines the vast
majority of rare earth metals. It alloys steel with rare earths to create
particular characteristics. It's now the world leader in high-speed steel.
The steel industry in China, nothing special; but Tiangong, doing well,
protects its margins well -- it's a growth company.
the reasons why emerging markets companies have not done so well is corporate
governance, and that particularly is the case in Russia. When we invest in
Russia, we're really very specific about the types of companies we invest in
and we spend a lot of time looking and thinking about management to make
sure that we're with the right people. We own a company called Raven
Russia. It's an investor in grade-A logistic warehouses in the outskirts
of Moscow and St. Petersburg. Raven is very well-run, and it understands
how to maximize its capital. They've not only been instituting
dividends, but also tendering for shares from shareholders -- it's a form
of buyback -- to maximize its balance sheet.
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