Bloomberg Portfolio Mashup Notes: Emerging Markets & China

Hello from the Bloomberg Portfolio Manager Mashup in NYC!

Below are my unedited notes from this morning’s sessions on emerging markets and China investing…

Panel:Emerging Markets Old and New

Peter Chiappinelli, Portfolio Strategist, Asset Allocation, Grantham, Mayo, Van Otterloo & Co. (GMO)
Joseph H. Davis, Principal and Chief Economist, The Vanguard Group, Inc.
Bernard R. Horn, Jr., President and Portfolio Manager, Polaris Capital Management, LLC
Igancio E. Sosa, EVP, Emerging Markets Product Management, PIMCO

Joe Davis (Vanguard chief economist):  Higher economic growth does not equal higher stock market performance – “correlation is zero” – more important is the price you pay for growth (valuation)
Last year EM countries grew 4 times faster than developed countries but their stocks trailed by 1000 basis points.

Peter (GMO): The Street has done a fantastc job as selling GDP growth as the road to riches.  The world believes in China growth and so do we – but China is in a massive real estate and infra bubble – all bubbles pop.  They often pop when central bankers believe they can execute a soft landing.  The track record of this is pretty dismal.  GMO says China cannot do it, they have hedged out China almost to zero, in some strategies they are net short.  “All bubbles pop and China is the mother of all bubbles”

Sosa (Pimco) says that “GDP growth is important in that it determines where interest rates are going.”  One of the biggest risks in emerging markets equities today is currency devaluation risk, a reason to look at EM debt first.  If you can’t earn a significant amount over the bond yield, you are taking more risk than you need to in a given country.

Someone was talking about how yield curve diversification is sorely lacking in the portfolios of US investors – EM bonds and fixed income can aid in that so long as you are mindful of currency risk.  This is an argument for investing in EM debt, not just equities.

Peter (GMO): Yum Brands is one of our larger holdings.  Highly linked to emerging economies.

Sosa (Pimco): Probability of outcomes no longer a bell curve – more like a camel with two very big humps representing two major risks.  Europe is a headwind for emerging markets near term but the secular outlook from every standpoint (currency, debt, equities) for EM is worth it.  There will be a move away from developed country debt to EM debt because the fundamentals so much better – upward sloping yield curves, sustainable and low debt to GDP levels etc.  The road will be bumpy.

Sosa (Pimco) “There’s a world of sovereign debt out there that’s shrinking – and it’s in the Emerging World where issuance was actually down last year.”

Horn (Polaris) Ways to avoid the big macro risk – Guandong company sells water to Hong Kong – not matter who defaults in Europe, Guagdong will have a long term steady cash flow, they are the only way to get water into the city.  You can find companies with strong cashflow and ignore some of the global macro risks with good valuations.

Best Ideas:

Pete (GMO): Most overweight Russian energy because of classic single digit PEs, double digit yields, cheap valuations.  Surgically short China (3 tier short position – tier 1 China banks and real estate, tier 2 australia mining, tier 3 european luxury goods)

Joe Davis (Vanguard): we are most bullish on earth, we want to own everything (stupid)

Horn (Polaris): Thailand is cheap because of the floods, Highest premiums and growth stock-esque prices are in Brazil which makes it hard to find good value right now

Sosa (Pimco): look for countries with positive real yields, policy flexibility, upward sloping yield curves – all points to Brazil, Mexico and South Africa – avoid central europe (more exposed to crisis, unorthodox policies)

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Panel: Betting On China

Moderated by Sara Eisen (who is impossibly adorable).

Speakers:

Lisa Emsbo-Mattingly, Director of Research, Global Asset Allocation Division, Fidelity Asset Management
Samantha Ho, Portfolio Manager, Invesco China Fund; Investments Director, China, Invesco
A. Gary Shilling, President, A. Gary Shilling & Co., Inc.

Shilling: China has areas of the country that are accessible only oxcart and only when the weather is dry – yet they still manage to put out a GDP number 21 days after the close of the quarter.  Someone high up says “We’re gonna have 8% growth this quarter, right?” and the statistician says “Coming right up, boss!”

Shilling is mad bearish on China, he expects a hard landing which would look something like 5 to 6% growth and an explosion in unemployment, possibly leading to civil unrest.  The only silver lining would be the taming of inflation.

Lisa (Fidelity) is also bearish on China, citing a huge spike in home inventories and declining sale prices.  “The thing that all real estate bubbles have in common, whether it’s the US, Sweden or China is that home prices are a momentum market and momentum works both ways.”

Samantha Ho (Invesco China Fund) is all like “why you all so negative?”  She runs a long-only China focused mutual fund so take this with a grain of salt, but she says of course the country is in transition as it seeks to develop internal consumption as the new engine of the economy.  And in this context, she says, a bit of a slowdown is a good thing.  She believes that the key to investing in China is not the overall economy, but stock picking – finding individual stories that make sense regardless of GDP growth.

Shiller shakes his head, he’s all like “we shall see, Samantha.”  But he didn’t say it like that, I could see it in his eyes that that’s what he’s thinking.

More later, guys!