Speaking at a press event in Sydney on Monday, Lazard managing director and portfolio manager Ronald Temple said although China could experience a “meaningful downgrade in growth” resulting from dissipating competitive advantages and changes in demographics”, there are still opportunities for investors in the emerging markets.
Mr Temple said demographic and productivity stories in many emerging markets are very good, but investors must recognise that all countries are different.
“If you’re a commodity exporter and Chinese growth goes to four per cent, this isn’t necessarily good news, but if you’re a commodity importer it could be good news,” said Mr Temple.
He said that for countries such as Mexico, for example, a decline in Chinese growth is likely to be positive since the country will be looked on more favourably by the US and Europe as another source of production offshore.
“I think Mexico’s a really good story; I think people got a little too optimistic early on. They’re doing some really interesting things with energy, they’ve broken up the telecom monopoly, they’ve tried to reform education and you actually have [political parties] agreeing on this stuff, which is unprecedented,” he said.
He also sees valuation opportunities in countries such as Brazil.
“The big Brazilian banks such as Banco do Brasil were trading at four and half to five times earnings seven weeks ago, so that was a stock we bought. It literally went up 36 per cent in six weeks,” he said.
Mr Temple said Brazil remains an interesting country for investors even after the big move in the market in the past seven weeks.
He also said the Philippines offers a strong macro story, despite its expensive valuations.
“They’ve done a phenomenal job in diversifying their economy,” said Mr Temple, explaining that the Philippines has captured considerable outsourcing and offshoring demand and unlike many economies in Asia, “exports to Asia really aren’t a material part of the story”.
“You’ve basically got a trade surplus, you’ve got a decent fiscal position,” he said.
“You’ve also got countries like Peru where credit penetration is really low, where you have zero net government debt, you’ve got consumer debt which is incredibly low, and you’ve got a lot of natural resources in a developing economy.”
