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Emerging Markets Equity 3Q'16 Themes: Dollar, Commodities, and China Sector Opportunities

TOM BUTCHER: After much appreciation, the U.S. dollar appears to have stabilized. What effect does dollar strength have on emerging markets?

DAVID SEMPLE: In general a stronger dollar is bad news for emerging markets. There are, of course, many exceptions on a company-by-company basis. A strong dollar tends to suck liquidity out of emerging markets. It also tends to weigh relatively heavily on the margins of certain types of companies within emerging markets. For U.S. dollar investors, it means the returns they achieve from emerging markets tend to fall due to translating emerging markets currencies into dollars.

BUTCHER: Can you speak about the pace of reforms in China and how it affects your outlook for the country?

SEMPLE: Reforms in China are very uneven. There are some great hopes for reforms, particularly in the state-owned enterprise sector, and also in opening up areas to private enterprise. It’s not quite clear at this stage what form a lot of these reforms will take in China. It may well be another manner of centralized control over some the industries, which is not necessarily a good thing. Or it may be more market-driven. I think the jury right now is still out in terms of what will happen with reform in China. However, reform is necessary; many industries have significant overcapacity and are significantly inefficient. We tend to invest in other industries, so we watch with interest. As these industries improve, there may be opportunities in which we may participate.

BUTCHER: Which themes do you think are most important going forward this year?

SEMPLE: In emerging markets, I think the dollar is one. The relative rebound in commodities is definitely another. To be clear, commodities and emerging markets have a somewhat nuanced relationship. They tend to move together. However, most emerging market countries are net importers of commodities rather than exporters. The reasoning behind that tends go more along the lines of: because global growth is improving, commodities are improving and emerging markets would be a good play on the improvement in global growth.

I think that people have been very reluctant to be involved in emerging markets over the last three to five years. The returns have not been as good as those of developed markets. Many people find themselves light in terms of positioning in emerging markets. There has been considerable discussion about whether people want to add to those weightings and whether now would be an appropriate time. Without offering an opinion on that, I think it's certainly something that people ought to consider.

BUTCHER: If investing in the cyclical sectors of China is particularly challenging, what other sectors do you find attractive or interesting?

SEMPLE: There are a number of sectors that we believe hold many opportunities for us. Many relate to what people want to spend their money on and reflect China’s secular growth.

For instance, education. People in China clearly want to spend more on their children's education as a percentage of disposable income, as compared to many developed markets. Anyone with college age kids in the U.S. knows the impact of Chinese students on the U.S. tertiary education system. There are certainly opportunities as people become more prepared, not only for university, but also for a career. It has become more and more important to have a wide skill set everywhere around the world, including China. There are some very significant related companies in which we can invest.

BUTCHER: Are people not only prepared to spend more on education, but also on health care?

SEMPLE: That is true. The whole health care industry in China is undergoing upheaval now. From the drug manufacturers to the distributors and hospitals. With that upheaval, there is some uncertainty but also opportunities for private players within the sector. As in many countries around the world, they are trying to get the cost of health care down. That means that they are encouraging efficiency within the system. Private players are providing alternatives, particularly in the hospital sector, and it's an area of much interest to us.

BUTCHER: Do internet-related companies remain an attractive proposition?

SEMPLE: Yes, there are some very attractive opportunities there. We have been involved in the space for a long time. With many longer duration investments, which internet companies tend to be, there can be some uncertainty because as the delta of growth changes, the valuation can change quite rapidly. Nonetheless, there's no question that there are areas such as e-commerce that are still growing more quickly than the rest of the world. That's certainly one of the sectors that we continue to look at day in and day out.

BUTCHER: Thank you.

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The Emerging Markets Equity strategy is subject to the risks associated with its investments in emerging markets securities, which tend to be more volatile and less liquid than securities traded in developed countries. The strategy's investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation. The strategy is subject to risks associated with investments in derivatives, illiquid securities, and small or mid-cap companies. The strategy is also subject to inflation risk, market risk, non-diversification risk, and leverage risk. Please see the prospectus and summary prospectus for information on these and other risk considerations.

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