We discuss social, political, and economic reforms in emerging markets with Alison Shimada, portfolio manager with Wells Capital Management’s Emerging Markets Equity team, in this excerpt of On the Trading DeskSM from Tuesday, July 1, 2014.
Let’s get an obvious question out of the way. Why do emerging markets need to reform? What’s the point?
Countries understand the fact that their citizens have to be happy and productive. And that the main point of that is to give people jobs, to provide health care options for them, and better housing. A lot of the social reform is focused around those issues.
Some of the institutional changes that might be taking place in emerging markets have been getting a lot of headlines. The election in India promised to usher in some reforms there. Are there other types of reforms or other countries within the emerging markets that perhaps could create a catalyst to unlock some value?
Yes, absolutely. I think on the tails of a lot of the elections this year, you will see quite a bit of movement toward economic and political reform. I think that’s a major catalyst for the markets in emerging markets this year—something that will catch people’s attention; it will be in the headlines. It also gives a country a clean break to start something new, to do things that should have been done, to close bottlenecks, etc. I think not only will we see that in India, but we have also started to see that once again in China—and we will see maybe, to a lesser degree, in Indonesia as well. Brazil needs to do this, and they have an upcoming national election. We’ll see a lot of activity around that in the fall and leading up to the fall. And, of course, it’s still a big question mark in terms of Turkey, what will go on in Turkey. And what the form of political rule will be in Russia going forward is another big question.
Are there any countries that you are very concerned about, that perhaps the reform agendas have been going in the wrong direction?
Yes. I think clearly the number one concern this year is probably Russia, because it absolutely positively took a 180-degree turn and was based on one person’s opinion and perhaps a few backers. But it’s significant because it impacts a lot of developing Europe—westernized Europe—in terms of energy consumption, energy supply, and also it’s just very difficult to predict what Putin will do next. It’s hard to have a sustainable relationship with other countries when you have somebody that unpredictable. It’s also difficult to keep capital in the country. I think you’ve seen a lot of capital flight already this year. It could continue, although the market is very reasonable in Russia. People are hesitant, and therefore, I think money will come in and out. It will remain a trade more likely than an investment, because ultimately the worst-case scenario is that you would get stuck in that currency and not be able to get out of those investments. We’re concerned about that. We are concerned about indebtedness in Malaysia. Malaysia is a major producing nation in Southeast Asia, but the level of consumer indebtedness is quite high. That’s always a worrisome factor in terms of consumption. And we’ve seen that before with nations in Southeast Asia as well.
So how do you as a portfolio manager manage some of these changes? I mean, these are big events!
For our team, we must have a vision and an outlook on each particular market—there are 21 markets in emerging markets—and we need to have a vision of that over the next 12 to 18 months in terms of how we think things will develop. And within that context or framework, we can make investments in that market. I think it’s very important to understand the currency risk, also GDP [gross domestic product] growth, the outlook for inflation, consumer sentiment, indebtedness of the consumer—these are all factors that will play into GDP growth, which is really the main thing that people will look at overall.
Alison, I would love it if you could give us a parting thought on the emerging markets.
Certainly. I think that the idea about reform is very important because it gives people a starting point; it gives them a little bit more hope, as consumers, that things will change, particularly if you’re in a situation that hasn’t been particularly bright in the last few years. I think it’s very important for people to move forward and to have a hope that there will be better jobs, better education, and better health care. And that will ultimately promote consumption in the economy.
Thank you very much for joining us, Alison.
Thank you, Brian. It’s nice to see you.