Morningstar Advisor - February/March 2010 - 38

Spotlight Trying to predict the future is a difficult exercise. Worried investors should hedge or think only in “dollar terms.” There is no alternative for the dollar as a single global currency. The euro will be more important as a trading and reserve currency, but it will not replace the dollar. Q: Do you think that emerging markets have gotten ahead of their fundamentals and that a correction is likely? related to infrastructure sectors (Bharat Heavy, Empresas Ica, GMR Infrastructure ) being strongly influenced by public sector spending and handouts. Our pure financial holdings (China Construction Bank, Itau Unibanco) are also tied to the retail and infrastructure markets. Credit creation in China, while slowed in the second half of 2009, will continue to fuel internal demand. Strauss: While we think Asian/emerging and are in arguably better shape. But like every market, it’s a matter of finding good opportunities, rather than just trying to pick which market to invest in and then matching a credit or security with that choice. For example, in my Global Bond fund I have a small position in an Egyptian T-Bill. Strauss: There are many who believe developing markets deserve a premium to developed markets due to the perceived healthier macro and micro prospects. We believe that quality growth companies based in developed markets but increasingly serving emerging markets as end clients—more than 25% of revenues—may enjoy an increased re-rating. Magellan Global: Investing in businesses whose predominant exposure is to household consumption in developed markets is likely to produce subpar results for investors. There will, of course, be exceptions where companies gain market share, achieve cost reductions, engage in beneficial M&A activity, or have other tailwinds such as network effects, etc. We seek to invest in these sorts of businesses; however, they will just be harder to find in the “new normal,” and thus we think that index investing may well disappoint over the medium to long term. It is important, however, to distinguish between a company’s domicile and its real economic exposure. There are many fine companies listed in developed markets that have very meaningful emerging-markets exposure. Q: What is the investing thesis for Japan right now? What needs to happen for the recovery to become sustainable? Moore: Japan is clearly cheap, but until they understand the need to earn a return for their shareholders, it will continue to be problematic. Short term, it is correlated to the U.S. market, so probably there’s no need to be there. Magellan Global: The headwinds to Japan’s Moore: Probably, but it will not correct until the U.S. market has run its course. Estabanell: Yes. The future is bright for the region, but prices have anticipated that too much. Iturriaga: Not at all. This crisis, on the contrary, has given us the opportunity of investing in these markets at a reasonable valuation level. There is only one path that the principal emerging economies of the world will follow, and at the end of the day, the big macro changes are a consequence of demography. This one is unstoppable. Lowenstein: Some emerging markets may have markets are overvalued today by 5% compared with developed markets, and while we think this premium is not justified, we don’t see a catalyst for a correction in the short term. Once such a correction arrives, as they always do, we would recommend this as an entry point for a long-term position. Q. Which emerging markets are the most overvalued and vulnerable? Lowenstein: China, even at these levels, looks scary to us. We struggle to see a bull case in most of emerging Europe. Brazil seems expensive. India is priced for the permanent absence of any bad news. Strauss: We think most Chinese equities remain overvalued after the flood of capital into this market, and South African-based companies remain underappreciated by the markets. Cartesio Inversiones: China is a bubble. Its currency is manipulated, it’s a dictatorship, and its energy and agriculture position is a long-term nightmare. Brazil is the only emerging market that ticks all the boxes: democracy, sustainable energy and agricultural position, vastly improved governance. Q: Does it make sense to favor developed markets right now? Gartside: Not really. Emerging markets have become fully valued, but we think mostly only on a short-term perspective. Few have made back their all-time highs, and most still have lower levels of foreign ownership than at their previous peaks. We will view any sharp corrections as significant buying opportunities in India, Thailand, the Philippines, Indonesia, Turkey, Israel, Brazil, and Mexico. Edouard Carmignac, manager of Carmignac Investissement, and Eric Le Coz, member of the investment committee, France: As has been the case since 2003, there is no doubt in our minds that the world rebalancing of growth toward key emerging economies such as China, India, and Brazil is our main driver for investment decisions. We have sought opportunities in emerging-market investment themes related to the improved living standards benefitting housing development (Cyrela Brazil Realty, China Overseas Land) and had their problems in the past but have reformed their systems. Now, they are providers of liquidity to the developed markets recovery do not seem to be abating any time 38 Morningstar Advisor February/March 2010

Morningstar Advisor - February/March 2010

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