Kevin O'Hare, co-manager of the Lazard Developing Markets strategy, discusses the compelling investment opportunities on offer in the emerging world.
After the recent correction in emerging markets, we are now more optimistic and can see meaningful upsides over a one-year period. While these expectations are not as large as we were anticipating in late 2008 and early 2009, we now see compelling investment opportunities.
It is important to highlight the Greek crisis has not emanated from within the emerging markets. Therefore, this situation is not reminiscent of the 1998 crisis, which was a result of crises that occurred in the developing world.
As was the case in 2008, EMs have reacted to the rest of the world and declines have been witnessed across most markets. Fundamentals remain strong on the back of continued economic growth within EMs combined with growing inter-emerging country trade.
As a result, we believe there will be sustained demand for commodities and basic manufactured goods over the next decade, much of which will be sourced from the developing world. Events such as the Greek crisis serve to moderate global growth, thereby increasing the world’s reliance on Chinese expansion.
One of the areas investors will watch closely in EMs is next month’s election in Brazil. Dilma Rousseff, the candidate of current President Lula to become the next president, gave a presentation outlining her political and policy objectives.
Rousseff worked her way up through the Workers Party and shares many of the same policy objectives as Lula. The risk increases whenever there is a presidential election as investors face the unknown in terms of policy.
In 2002, investors feared Lula and sold the Brazilian market. With an election in 2010, investors again face the unknown but we anticipate the policies to remain the same, so markets should be little changed.
We believe the market reform process will continue in this and several other countries that have historically had populist-minded governments, as the benefits of more efficient and advanced markets have become increasingly apparent.
One of the factors contributing to Brazil’s success is its declining inflation rate, which has permitted interest rates to decrease and allowed traditional lending to take place. As a result, we have seen a significant amount of loan growth in Brazil. The same can be said for Turkey, Egypt and many other EMs.
We are not always positive about the outlook for all of our global EM strategies. However, given market weakness and positive fundamentals, we believe long-term investors should seriously consider investing in this area at this time.
Kevin O’Hare is co-manager of the Lazard Developing Markets Strategy
