These are interesting times for an emerging markets investor. What is your view on the recent selloff?
It is notable but not significant in the context of emerging markets history. What happened is that three years ago you had the [US Federal Reserve] lowering interest rates to almost nothing. So bond investors looked at the emerging markets and realised that the [credit] rating houses were upgrading them — because foreign reserves were growing, debt-to-GDP levels were lower than developed countries and economic growth was double or triple. But what was most significant, however, was that they migrated into local currency bonds, which in the past they never did... They always considered emerging market currencies too weak, too volatile or just too risky.
Then the tapering talk began and they all said: ‘Hey, interest rates in America are going up. I better get the heck out of these trades.’ So they started exiting and the currencies went to hell — and when people see currencies going down, they want to get out of the equities (which by the way is not very logical). That's why we've seen this [large capital] outflow.
So is it a blip?
Investors are now beginning to wake up to the reality that the rating agencies still maintain pretty good ratings for these emerging countries and their currencies are now cheap. So we're beginning to see the flow coming back in.
Another element in emerging markets now is the addition of so-called frontier markets, which are growing even faster than all the rest of the emerging markets. To give you an example, in the short period of roughly three-and-a-half years we've raised about $4 billion. It got to the point where our board was worried about liquidity issues.
Another recent selloff affected Chinese internet stocks in the US. Are you buying?
Back in 2000 we went through this dotcom boom and bust — and I must admit that we missed that on the upside and the downside. We were not participating because we were adhering to a value philosophy and we couldn't see the growth. We should have paid more attention. When we look at value, we look at the five-year view and we couldn't see that kind of growth, which was the wrong assessment. This time around we now realise this is here to stay and is going to be something really important.
Valuations are still challenging. How do you select investments?
It's really a minefield out there but if you look at a company like Tencent you realise there’s something substantial there — they can make money, they can be run as a regular company. We’re still putting our toe in the water but there's no question that the internet is revolutionising what’s happening in commerce and other areas, particularly with the growth of smart phones. This is one of the things that makes frontier markets so exciting; they're leapfrogging over all the technology we had to go through and they’re going to the latest iteration. That is going to have a big impact for our portfolios going forward.
In what way?
It’s about productivity. Every time you’re lowering prices and speeding up delivery you’re increasing productivity dramatically, and that's in a field — services — which normally would be considered very complicated. Just imagine what’s happening in manufacturing. It’s no secret that the manufacturers in China are moving into robotics in a big way.
Indeed, some of the most fundamental themes are very well understood and broadly discussed. How do you find value?
From time to time you get a price decline that opens up an opportunity to buy something relatively cheap. For example, you might get that opportunity in Russia now, in some areas that were quite expensive before. There was also that opportunity in India during the recent downturn. A lot of people think these markets move in unison but they don't, there are significant differences and pockets of deep discounts.
Have the protests in Bangkok opened many opportunities?
The problem in Thailand is that it hasn't come down enough. People are getting used to it and they're not reacting as we would like — they’re too optimistic.
Which sectors are you most overweight?
We’re most overweight in consumer [stocks] because per capita incomes in these countries are going up. So we’re in anything that hits this segment. It also depends on the market — in frontier markets we like banks because they reflect the growth of the country generally. But not in all markets. Chinese banks are not something that we would want to be exposed to just yet.
Are you concerned about China’s debt problems?
What you can expect in China is more bad news on bankruptcies and failures, but you should not pay too much attention to that. Put it in context. In the last 12 months you've had two bond defaults in China. The US has had 88.
The Chinese government wants to create a market economy with market signals. They want these state-owned enterprises to clean up their act because they realise that the basis for corruption comes from the lack of corporate governance and that the only way you're going to improve that is under the discipline of a market situation where the shareholders can demand certain reforms.
How does that affect your investment decisions?
We concentrate on state-owned enterprises that seem most willing to move in that direction — and private companies that are already there. For example, I prefer a Tencent over an Alibaba because of corporate governance.
So was HKEx right to turn down Alibaba’s IPO?
They were very brave. Either very brave or too late to make the change in the rules. But they should be congratulated. We need more of that. We need more of the stock exchanges upholding certain rules because in the long run it will be good for them and good for the markets. It's a step in the right direction to not allow these dual structures. Take a page out of Taiwan’s book — they demand that all listed companies report earnings every month. That's transparency. That's amazing.
Lastly, I’m not sure if you’ve had a chance to see Michael Lewis’s new book, Flash Boys, but what’s your view on high-frequency trading?
It just does not make sense. The Brazilian market proudly said it was constructing another building next to its exchange where the HFTs can instal their massive computers so they can have immediate information... I mean what is this? It's not a level playing field at all. I think Michael Lewis was spot on. It's another example of where the regulators have been sleeping on the job. They should have been after this a long time ago because you can't have this situation where one guy has a leg up and knows what you're going to do and can front-run you. They say it helps liquidity. I doubt it.
