Antoine van Agtmael has been investing in emerging markets for over 35 years. The chairman and chief investment officer of Arlington, Virginia-based Emerging Markets Management LLC, which has close to $13 billion in assets under management, coined the term “emerging markets” in the 1980s and has written several books on the subject.
Van Agtmael, a former World Bank economist, recently spoke to Institutional Investor contributor Tracy Tjaden about opportunities in 2011 and the threat of a bubble.
Do you subscribe to the theory that emerging markets have now emerged?
They have not fully emerged, depending on the country, at least not yet. They’re more like teenage markets. They’re moving in that direction but they’re not there yet, either in terms of economic development, corporate governance standards, the market regulations or the way people invest locally. There is still a ways to go.
What’s your outlook for 2011?
I don’t make projections, but I will say next year our chances of doing better than the developed world are better than us doing worse. It’s not going to be one of these stellar years because the global economy is still anemic.
What have investors learned about emerging markets in the last few years?
If they got in late in 2008, they think emerging markets are the best thing since sliced bread. If it was 2007 they think they’re the most volatile thing you can imagine. If they’ve been in for 23 years like we have been, they know we have just gone through more than usual ups and downs — this time caused by things not having a lot to do with the emerging markets themselves.
What’s your take on current allocations to emerging markets?
People follow the MSCI Index and in that world, emerging markets are 13 percent of the total investable universe. I think that’s just plain wrong. All kinds of things are excluded from their definition. Many investors are simply looking at the wrong benchmark.
The full market cap of emerging markets is really closer to 28 percent, and Goldman Sachs just came out with a new report on emerging markets that says it’s 31 percent. This is what I’ve been saying for years.
Let’s say the world’s largest investors read this article and immediately bump their allocations from six percent to 30 percent. All hell would break loose — we would quickly have a bubble, but it is unlikely to go so fast and for the record, now I do not believe we are in a bubble now. The best way to invest in emerging markets is to average in and average out with a gradual increase of your target by a few percent of equities each year.
Is it that people are overestimating the risk in emerging markets?
In October 2008 there was talk about submerging markets, the idea that if it’s bad in the developed world it must be worse here. That turned out to be wrong. I’m not saying there are no risks — the question, though, is perception of risk.
Meaning?
Things were better in emerging markets than investors believed but worse than they had thought in the developed world. That caused a major adjustment in thinking, not just about opportunities, but also about risks.
Do you believe emerging markets should trade at a discount?
No, not any more because you’re getting a better deal overall. You take more corporate governance risk, but you take less risk on economic growth. You are taking slightly more market risk with volatility now only marginally higher, but if you don’t do it you are not participating in what is the most dynamic, growing part of the world.
Given your position that allocations are far too low, do you think we’ll see more pension fund trustees speak out about upping these levels in 2011?
There is no question about it – it’s way overdue. It will happen. I just hope it doesn’t happen too fast. But I can tell you my children will find it crazy in 10 years to not have half of their equity portfolios in emerging markets.
If sentiment does change like that in 10 years, isn’t a bubble inevitable?
Yes there is a very high probability if it would happy too fast. And a drop will follow.
My advice: average in and average out. You can’t go wrong. If you want go from let’s say 6 to 40 percent in 10 years, that’s 34 percent, that’s 3.4 percent increase per year. But you don’t panic and you don’t get overly enthusiastic. When everyone likes it, you know there’s a bubble so you stop investing for six months to a year. When the market drops, you come in and for the first few years double the pace.
That’s a pretty structured approach and it would require discipline. It’s more than discipline, it’s a conscious ignoring of your animal spirits. Just keep them in the cage.
What’s the region to watch in 2011?
The Middle East. It’s a cheap cash flow machine. I’m overweight in the Middle East — they have much lower PE than companies elsewhere, they have good growth prospects and they benefit from the fact that they have money there and they’re using it. Sometimes this goes overboard, we saw that in Dubai, but in the long run it works.
You’ve been investing in Africa longer than most. What’s your view of the region now?
We’re performance hunters not asset gatherers. We’ve had an Africa fund for 17 years and its performance has been several times better than emerging markets, with volatility that has been half as much as emerging markets. Now it has over $800 million in assets, which makes us the biggest [investor in Africa] and that doesn’t include South Africa.
What do you own?
Primarily we invest in stocks, I always say beer, banks and bouillon, which is perhaps a little flippant. We also own a few mines and other commodities producers. We try to invest in a number of companies that are profitable local affiliates of very major companies — the Guinness and Unilevers of this world.
We are not as daring as you might think. We went into the equivalent of the Wild West of investing but it’s not like we’re investing in the local gold digger, but rather the local grocery store, which tends to be very profitable and you can buy them at half the price.
We have three people who focus on Africa and travel there constantly and a portfolio of about 60 companies from all over Africa. And we do this very much from the bottom up. You pick a stock first not a country, and you really have to know the stock. We don’t look at the index.
Thoughts on China?
My belief is that China is neither superman nor about to fall off a cliff. I believe China will become the anchor economy, replacing the U.S. There will be slower growth in China but it will remain strong. It is in a steady climb toward being a world power and it is doing things in a smart way, with trains, electric cars.
Will we continue to see emerging markets increase the amount of trading and investing they do with each other?
Yes, and this is key. It marks a huge shift in the balance of power.
