67 WALL STREET, New York - September 11, 2012 - The Wall Street Transcript has just published its Investing in Emerging Markets Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with highly experienced Money Managers. The full issue is also available by calling (212) 952-7433.
Topics covered: Investing in Emerging Markets - Investing in China - Natural Resources - Emerging Middle Class
Companies include: Wal-Mart Stores Inc. (WMT) and many others.
In the following excerpt from the Investing in Emerging Markets Report, an experienced portfolio manager discusses his investment thesis for developing economies:
TWST: What are the big-picture investment themes that form your investment decision making today? I believe you follow an approach you term MANTRA.
Mr. Leverenz: Yes. We are the manic investors in the context of looking for the big ideas, and the big ideas we clarified a long time ago. In fact, none of us can recall exactly when this MANTRA was developed. But the idea is that if one is sitting up in an airplane and looking down from 38,000 feet, what we're looking for is, from a distance, where are the big ideas located? What that really suggests is where are the opportunities within the global economy, which is relatively pedantic in terms of growth these days? We look for opportunities where there is structural growth and where those opportunities we are able to take relative share of the global wallet. MANTRA, which is an acronym for mass affluence, new technology, restructuring and aging, has been a prism by which we could look across the world and see some of the significant shifts going on, both in terms of the economy and demographics, around the world.
If you look at the developing world, I would say there are two very significant and interrelated themes. The first and most powerful theme is really about history. This is about the ascendancy of the emerging markets and the developing countries after decades, and in some contexts, centuries of relative underperformance.
If one looks at the last decade, we've had a huge transformation in the underlying economic growth trajectory of much of the developing world. Why is that? I think that's related to a structural phenomenon and to a cyclical phenomenon. The structural phenomenon is that many countries received their independence in the 20th century from colonial circumstances. Whether it was Nasser in Egypt or Nehru in India or, of course, Mao Zedong in China or Uncle Ho in Vietnam, the reality is most of these countries were very badly navigated in terms of economic policy.
I like to draw an analogy to economic slavery, which is these were not very productive economies. These were economies that, postindependence, really wanted to develop rapidly through rapid capital deepening, but they had very low productivity and extremely poor incentives. So the reason why the emerging markets are where they are now in terms of interest and development is because all those things led to a collapse. The Soviet Union, obviously, collapsed in the 1980s with the oil price, and subsequently, the breakup of the Berlin Wall leading to the final collapse of the communist system across Eastern Europe and the former Soviet Union in the 1990s; China in the late 1970s after a disaster associated with extremism and the cultural revolution; in the early 1990s, India faced a foreign exchange crisis and a significant economic reform.
The structural underpinnings of the emerging markets are really about massive economic restructuring and reform. China is the poster child for that. What we have seen in China in the last 30 years is a serial restructuring of an overcentralized, badly governed economy, and that will persist for a much longer period of time. The same thing has happened straight across the developing world.
So in essence, if you are an economist, what you see is that these economies, which were badly governed, have really embraced globalization, have really embraced economic reform, and what you are seeing are low-productivity economies starting to become more productive. With greater productivity comes greater wealth, with greater wealth comes higher levels of savings. With higher levels of savings, mathematically, capital formation can increase because it can be funded domestically, and mathematically, you get a virtual circle of economic growth. That's the big story in emerging markets.
What that's translating to, from an investment perspective - and you can see that not just in the developing world but just about any significant multinational company in Western Europe, Japan or America as well - is that the biggest theme in the world right now is not just the reemergence of the emerging markets, but also about the emergence of a very significant continental-size consumer class across many of these geographies, whether that's China, which is the most important, or whether that's places like India, which are much earlier in the development phase, or whether that's broad bases of emerging consumers in places throughout Latin America, like Colombia, Peru and Brazil. That's really the big opportunity in the long term, and why you want to be invested in the emerging markets, because consumers in these geographies, the much-famed middle class that has developed in the last decade or two, have very different behavior and significantly different investment opportunities than when they were stuck in poverty in terms of low incomes.
And that creates all sorts of interesting opportunities for exceptional companies, whether it's retailers that have massive advantages associated with economies of scale, whether that's branded products, consumer staples companies, consumer durables, where brand is able to extract meaningful economic rents, or just about any other sector that we're investing in. So I would say the most significant opportunity is clearly all about the emerging markets consumer.
TWST: Would you give us some favorite investment ideas and discuss why you like them? How do they fulfill the criteria you use in selecting investments, and how do they exemplify those kinds of opportunities you see in today's environment?
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- Emerging Markets