How emerging markets are evolving (excerpt)On the Trading DeskSM—
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist
Emerging markets economies are becoming more mainstream economically and not so much a niche asset class. Anthony Cragg, emerging markets portfolio manager with Wells Capital Management, joins us from Singapore to explainin this excerpt of On the Trading DeskSM from Friday, September 6, 2013.
Anthony, I imagine in order for an economy to compete on the world stage it’s necessary to become investor-friendly. Are there bright spots in the world you can point to?
There are those who definitely made progress over the last few years in terms of things like education, infrastructure, reform, fighting corruption, getting the population out of poverty. All these things make it more appealing to a global investor such as us. I think China definitely has made enormous progress. If you visit China today versus 10, 20 years ago, I mean it's really a different country. Despite its recent problems, I would put Brazil in that category; I think Brazil, going back a couple of decades, was a basket case. Now, it's a very significant emerging economy. Those are the sorts of things we're looking for.
Are there economies that concern you?
I would say the obvious one really is India. I think we've seen policy paralysis, and the state of the infrastructure is still extremely poor even in terms of something as simple as electricity generation. I think corruption is still a major issue. I think that country has proved unable to engage enough of the population. It has been a mini economic miracle in the last few years, but there are still huge portions of their Indian population who have been left out of that so-called miracle. So I think India really has not made the progress it should have. And the other one among the four BRICs is Russia, where I think you have to say that you have more of the laws of Mr. Putin rather than the rule of law, and those two things aren't exactly the same thing.
Now, how are companies in emerging markets evolving?
We have an ESG [Environmental Social Governance] focus. Environmental issues in a lot of these emerging economies have become top of the agenda. Basically, with the growth that they have experienced over the last few years, there's been environmental degradation and pollution and so on. So, countering that, particularly in places like China, is really a major, major policy issue. The other one is definitely corporate governance, trying to focus on responsible management and so on, very important. Another is really just putting their financial house in order. I think emerging markets learned a lot from the Asian financial crisis and also from the global financial crisis, and in many, many cases, companies are in better financial shape; their balance sheets are stronger. And also, importantly, they have now a very significant local investor base, which they wouldn't have had in the late '90s during the Asian financial crisis.
As a professional investor, you’re looking for both growth and income from a company. Is that characteristic of how the emerging markets asset class is evolving?
Absolutely, that's a focus for us. It is estimated over the last 25 years that around a third of your total return from emerging markets investment has come from the dividend flow. So we do see a consistent reliable dividend stream as a good indicator of management quality, of cash-flow generation, responsiveness to the shareholder, a strong balance sheet, and so on. We think having the ability to generate a return for our investors through both capital appreciation and the dividend stream, income, means that your total return will almost necessarily be superior than if the income was just ignored. It's really a very significant part of return. And perhaps more importantly, it gives you not only good what we call upside capture, but it gives you some downside protection through the safety net of the dividend element.
With the moment that remains, Anthony, we welcome a parting thought.
Yes, absolutely, Brian. I think some of these concepts we talked about like dividend-focused investing, like ESG investing, are evidence of how emerging markets investment generally is evolving. I think the first phase of emerging markets investment was a rather plain-vanilla one where most EM managers were simply trying to give investors exposure to emerging markets. I think in the future we'll see a much more targeted approach, sort of laser-guided approach, as active managers add value over what you could just get through ETF investment.
Anthony, thank you for joining us here On the Trading Desk.
Great to talk to you again, Brian.
The views expressed are as of 9-11-13 and are those of Brian Jacobsen, Ph.D., CFA, CFP®; Anthony Cragg; and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.