In part two of our interview with Allan Conway, manager of the Schroder Emerging Market Equity Fund (SEMVX), he says investors need to keep a long-term view when looking at fund performance over time.
Kate Stalter: I want to talk for a minute about fund performance. Obviously there’s an outstanding three-year track record, but how should investors be patient through drawdowns in any mutual fund—including yours—such as what’s occurred in the past year or so?
What would you say to investors who would get impatient if a particular asset class might be out of favor, such as what happened with emerging markets?
Allan Conway: It’s terribly important that investors aren’t too short-term about this. If we look at the performance of emerging over the last 12 years or so, since the lows in 1998, investors in emerging have made about 540%.
To give you the similar numbers, if you put that money instead in the US, you’d be up about 70%, in Europe about 60%. So you’ve made something like six times the money in emerging than you’ve made in these other areas.
Now, what’s absolutely terrific about this is that despite the massive outperformance, these markets are still historically very, very cheap. The reason for that is that all of the price rise has been justified by earnings growth. There’s been no re-evaluation of the market.
Investors today have an opportunity to get involved in these markets at a lower valuation than you’ve seen for most of the last ten years. These markets are the growth story not of just of today, but of tomorrow.
Two and a half billion people in India and China are finding themselves with some disposable income, getting richer. This is why emerging is now accounting for 65% to 70% of growth in the world. It’s US, Japan, and Europe relying on emerging to drive the global economy, and that’s not just the story for this year, that’s the story for the next five, 10, 15, 20 years.
So the global economy is now driven by the emerging world, and that’s going to lead to ongoing very profitable investments. There will be some ups and downs. You see that not just in emerging since the crash; you’ve seen massive volatility in markets generally.
At least in emerging, you’ve got phenomenally strong economic fundamentals…a powerhouse of the global economy and investors really shouldn’t be too short term about this.
Kate Stalter: The growth story is pretty compelling and easy to see, but what about some of the concerns? For example, with regard to inflation—which can be particularly acute in emerging markets—and people are worried about that on a global scale as well. Any thoughts on some of the risks ahead, Allan?
Allan Conway: Yeah, on inflation in particular, I’d actually say that that’s largely yesterday’s story. Last year, people got very worried about inflation, primarily because there was a lot of food-price inflation.
We know, and economists confirm, that food price inflation rarely leads to underlying core inflation going up. The reason is because when food prices go up, there’s a very fast supply response. More land is cultivated, more livestock is bred, and it stops getting into underlying inflation. That’s what’s happened over the last six months.
You’ve seen a big fall in food prices. Core inflation has stayed pretty benign. So we don’t see any underlying immediate inflation problems in the world of emerging.
Issues that people are worried about in terms of German investment pretty much relate to the developed world. What’s going to happen to the euro? The Greek story isn’t over yet…contagion into Portugal, Italy, and Spain. In the US, the lack of a fiscal response to these debt problems. Very anemic growth in the US, largely a jobless recovery.
The way those affect emerging is not so much directly in terms of economics; it’s really an effect of sentiment.
However, probably the one issue in emerging specific to emerging that people have been worried about is a China hard landing. Concern that the Chinese economy, which has been growing at 10% per annum for some considerable time, is slowing and if it slows too much, that’s going to have a massive knock-on effect for the global economy.
We think those concerns are overdone. The reason we say that is because if we think about what you mean by "hard landing" in China, normally people understand that to mean going below 7% growth. It’s the Chinese definition of hard landing.
We don’t think the authorities, if there’s any sign of that degree of weakness, would allow it. They would immediately come in with very strong fiscal stimulus and monetary easing.
For two reasons I say that: One, because they’ve actually got the ability to do it. The cupboard is bare in the US. The cupboard is bare in Europe. They’ve already provided the fiscal stimulus and are suffering massive debt as a consequence.
China has got the ability to stimulate and they will do it, because they know that the way that they can insure ongoing political stability and the status quo is by insuring ongoing economic prosperity.
Two, the most destabilizing thing to the political status quo would be social unrest. So they’ve got a very strong interest in making sure there’s no hard landing, and they will insure that’s the case.
So we think China will come in with 8% growth this year. A bit of a slowdown, but it’s still very good.
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