Philippe Langham
Emerging Markets Manager SGAM UK
(Easybourse.com)
Do you think the term “BRIC” is relevant? Could you think of another way to define these countries that would be more accurate?
The term BRIC is appropriate when reference is made to the four largest emerging market economies – Brazil, Russia, India and China but it would not be appropriate to use it as a substitute for the total global emerging market (GEM) universe. It seems likely that the term will stay and not be changed providing all of the four BRIC markets perform well but if we were to see these markets underperform the broader GEM universe, the term BRIC will fade away.
How could you explain the BRIC is such a lucrative area for investors?
The four BRIC markets comprise approximately 40% of the total emerging market capitalisation and are therefore very significant to this asset class. BRIC by itself would not normally be considered an allocation region by investors, however, emerging markets would and these have become a very important asset class and now represent 8% of the world’s market cap and 50% of the world’s GDP. They also provide approximately 80% of the world’s GDP growth. These figures have been increasing over time and this trend is likely to continue given the superior growth of these countries. Including emerging markets outside of BRIC allows a significant increase in opportunities as well as diversification benefits.
The BRIC products are highly competitive when compared to their equivalent in developed countries or to the “global emerging” index. Why?
Both global emerging markets and BRIC products have significantly outperformed developed markets due to higher growth, significant improvements in corporate performance and profitability, stronger macroeconomic fundamentals, appreciating currencies and under-valuation. BRIC funds over the last 3 years have tended to slightly outperform GEM funds (depending on the period) largely because of the sectoral make up of these four markets which have a higher weighting in the very strong performing energy and commodities spaces.
Could you give us examples of domestic reforms that would allow a convergence with the operation of economic activities in developed countries?
An interesting question but perhaps it should be the other way round – how can developed countries make internal reforms which would allow convergence with the way economic activities function in BRIC or GEM countries? These countries have far superior growth, high savings and investments, low tax rates, fiscal and current account surpluses and huge reserves. On the other hand developed markets have the bulk of the world’s current account deficits, have been losing market share, have low real wage growth and have virtually all the world’s debt. Of course there are still some economic reforms that we can look forward to in the emerging world such as further currency liberalisation and deregulation, both of which would add to the attractiveness of this asset class. However, in GDP per capita terms, emerging markets are catching up with the developed world and in most cases do not need to change the successful policies they have been implementing.
How do you operate your investments in this area? How do you detect investment opportunities?
We use a combination of a top down country allocation model and bottom up stock selection based on cash flow growth, valuation, quality and long term growth prospects as well as our assessments of factors such as industry prospects and management quality. Our Global Emerging Market Fund looks at all GEM markets and not just the BRIC grouping. We look to meet the management of the companies we invest in and have a focused portfolio which concentrates on the highest quality companies. We take a lot of time finding the companies we really like but when we do find them we tend to stick with them. We find that this approach of concentrating on long term winners makes sense and produces much more successful results than approaches which aim to predict short term movements.
What are the main risks of investing in these countries? Are there specific risks for each country? What do these risks consist in?
The main risk is of course a deepening and lasting US crisis affecting global growth and global markets. Political risks are an issue, too, although a political crisis in one country doesn’t affect its neighbours as much as in the past. This risk can therefore be avoided by investment in a diversified mutual fund. From an economic point of view inflation could be a problem if we see further food and commodity price hikes but the current global debt crisis which is quite deflationary in nature should mitigate this concern.
How do you manage these risks? What systems do you have to control them?
We have a thorough risk control process which examines risk from a top down perspective analysing potential political and macro developments as well as stock specific risk which we monitor through a quant process. In addition we focus on having high diversification, both country and sector, as well as limits at the stock level. We also monitor tracking error and check that current themes and sector tilts are reflected in asset allocation. A further check is our in-house dealing and portfolio management system, presided over by our dedicated risk department, highlights client restrictions and monitors and controls portfolios so that they do not breach any restrictions.
Did you encounter any legal problems when investing in these countries?
There are various administrative procedures that need to be undertaken before investing in most markets and these can be quite cumbersome but we do not encounter regulatory obstacles that prevent us from investing anywhere we want to invest. We have been investing in these markets for a long time and have therefore resolved most of the typical regulatory issues which investors might face and have found ways to successfully invest in these markets. Of course there is very limited foreign access to China’s A share market but this is not a problem as the stocks can mainly be purchased for much lower multiples in Hong Kong.
Do you think it would be preferable if more freedom was granted to the international investors in these markets? How this could be possible?
Most markets have open access but there are foreign restrictions in some markets like India or Thailand although as previously mentioned we do not find that we are prevented from investing anywhere we want to invest. Of course moving towards easier access and greater freedom where it does not exist would be desirable.
Do you think that the authorities will allow more liberty? Why?
The Chinese authorities are gradually moving in this direction but of much more significance is that they are starting to allow the local Chinese to buy into foreign markets. This is a huge pool of money which is likely in the first instance to target Chinese shares listed in Hong Kong and narrow the very large difference in valuation that exists between the much higher valued local China ‘A’ share market.
How do you think the financial markets will grow in these countries within a few years?
The movement towards easier access for foreigners will clearly continue as it is in everyone’s interest. As for the markets, in the last few years we have seen huge growth in their size as more and more companies have got listed, particularly in China and Russia. This trend is likely to continue as the economies in these markets keep accelerating and the need for capital grows in all sectors. Infrastructure is one area in particular that we expect to see expand throughout the emerging world as in countries like India the poor current state of infrastructure is a bottleneck to faster growth and the willingness to spend in this area is increasing. This is exciting as we can look forward to further high quality growth companies in a wider range of sectors joining this asset class.
Interview by Imen Hazgui
Publié le 06 septembre 2007
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