Political Catalysts in Emerging Markets Equities
Global Growth and EM Performance
DAVID SEMPLE: Emerging markets have done much better this year and I think that's a reflection of better global growth. It’s not clear that we're truly out of the woods yet but it certainly looks as though with most global metrics, growth is getting better. We've also had some good proximate causes of better growth, including elections in places such as India, but also China has become a more acceptable part of emerging markets for many people. Many investors think that maybe, though there are challenges, in the short to medium term, there are some tailwinds behind the Chinese growth story, which is clearly very important for the emerging markets.
Chinese Economic Reforms
SEMPLE: Chinese economic reform is both a temporary stimulus and a long-term opportunity. Clearly there has been some fiscal stimulus, i.e., more spending. Typically in China that means more debt. We can all be worried about that but on the other hand there are some great reforms taking place in China. The sort of pilot scheme for mixed ownership with State-Owned Enterprises (SOEs) with private parties getting involved in some of the SOE business is very positive. Hukou reform – Hukou is an official residency in Chinese cities – is changing as well. The property market is still a bit of a concern although it may be looking to stabilize now. There are many things taking place. Of course I should mention the anti-corruption drive, which ironically in the shorter term serves to bring economic growth down, but in the longer term is very positive. The ability to go after those called the tigers and the flies and the mosquitoes – in other words, the big guys, the medium guys, and the small guys – is notable and has been persistent.
Energy Reform in Mexico
SEMPLE: It's interesting that the emerging markets have been rewarded for their reform moves. Mexico is a country that has gotten its act together in terms of instituting reforms in areas such as energy policy. No longer is Pemex the sole developer of all of Mexican energy assets and I think that's very positive in the long run because the geology that has created such excitement in Texas doesn't stop at the borders. The benefits that U.S. industrials have provided to cheap energy will extend down to the maquiladoras in northern Mexico. That's very positive.
SEMPLE: India, with the election of Modi, faces a great opportunity to kick start its economy. In Indonesia the very popular Jakarta governor is now the president of Indonesia. That country clearly needs investment in infrastructure and other reform measures, which will be positive for that country.
Finding Structural Growth
SEMPLE: Structural growth for us is something for which we have a high degree of certainty that it's going to happen in one form or another. We are unsure of the trajectory, and the pricing of structural growth might be too pricey for us, but I think that structural growth is visible and means persistent growth in our lexicon. What it doesn't mean is cyclical growth. What it doesn't mean is opportunistic growth. We're looking at the longer term when we invest.
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