The Global Emerging
Markets Fund
Consistency of process is a key part of investing in emerging markets. Our investment team relies on a very focused method with a relatively small list of stocks in the portfolio. We use an active management approach - we're not afraid to back our judgment for the right investment opportunity and we're also not afraid to cut a position if it fails us. We make our decisions based on what we perceive to be our advantage: the discipline, rigor and thoroughness of our investment research.
What are the opportunities in emerging markets?
When you invest in emerging markets, you are essentially buying into an expanding, globalized labor force. Workers in China are paid $2 an hour, compared to workers in Europe who are paid 15 times that amount. What's less known is the high productivity of those emerging-economy workers. For example, real wages in Turkey have plummeted over the last five years, yet productivity has risen by more than 50 percent.
According to the World Bank, about 84 percent of the world's population live in emerging markets. But in terms of income, emerging markets account for only 16 percent of the world's GDP. By contrast, developed countries such as the United States, Canada, Japan and those in Western Europe represent 16 percent of the world's people, but 84 percent of its GDP. When you adjust the measures to reflect actual purchasing power, emerging markets rise to 38 percent of global GDP. In terms of stock market capitalization, however, emerging markets are only 5 percent of the world's total, whereas they account for nearly two-fifths of the purchasing power parity.
Despite setbacks, the fundamental economic underpinning of the emerging markets asset class remains strong.
Despite the recent runup and subsequent price weakness, we don't believe emerging markets have risen to full valuations. As with any market pullback, this recent phase needs to be viewed in the context of the rapid rise that preceded it. For many stocks, the flood of liquidity into the asset class had driven stocks to unsustainable levels. This said, there are still clear opportunities for bottom-up investors in emerging markets.
The primary global event behind the recent market weakness has been rising interest rates. For the first time in several years, all of the world's largest economies are seeing higher interest rates, and investors are getting worried that the higher rates will begin to slow the strong consumer spending in the U.S. and elsewhere. That has been the major driver of the global economy in recent years.
Another concern in emerging markets is that company profits do not grow as fast as previously predicted. In emerging Asia, for instance, Citibank estimates that earnings will grow 9.4 percent this year, down from its earlier forecast of 11.5 percent. There have also been country-specific issues. In Turkey, those issues include inflation, a falling currency and a growing trade deficit. In India, there has been concern that a capital-gains tax would be imposed.
Most analysts believe there is only a slight risk of either higher inflation or a global hard landing. The global economy remains strong and the gentle recoveries in Germany and Japan can take some of the pressure off American consumers.