“We obviously will use this as an opportunity to distinguish between sectors – and countries, in this case – that are likely to be hit less,” he says.
“We don’t have much sympathy for a place like Argentina, but we obviously have a soft spot for Chile,” where the fund has big investments.
“And we like countries like Peru and Colombia because they are trying to follow in the footsteps of Chile.”
Brookfield Asset Management, which invested in U.S. shopping malls during the financial crisis of 2008, has $21-billion of assets in South America. “Economic growth can be uneven, and political shifts are occasionally dramatic,” Brookfield Asset Management CEO Bruce Flatt wrote in the firm’s third-quarter letter to shareholders. But still, he added, “we believe in the long-term potential of emerging markets.”
And CPPIB has taken a huge bet on the potential of fast-growing regions, investing over $17-billion in emerging markets as of March 31 last year. The fund argues that the world’s centres of economic and demographic power are shifting to countries with higher economic growth rates such as Brazil, China, India, South Korea and Indonesia, and in coming decades they will become the world’s best investment markets.
Michael Wissell, senior vice-president of public equities at the Ontario Teachers’ Pension Plan Board, says recent turmoil has changed nothing about Teachers’ investment strategy in emerging markets, where it owns companies in countries such as China, Brazil and Chile.
He said lower prices may also create opportunities for deals on good assets, especially if the drop is overdone in certain markets. Teachers is particularly committed to Asia from its base in Hong Kong, he says, and believes there are long-term opportunities in markets such as China. “We’re believers in that area and we’re there for the long haul, and we expect to be there for the long haul. We have lots of assets listed in emerging economies, and I would wager a guess that many years from now we’ll still have many of those assets.”
Winners from the losers?
Still, the speed with which events are unfolding is catching many by surprise. While Argentina was devaluing its currency and protests were growing increasingly violent in the Ukraine, Mr. Simmons was meeting in Singapore with various Canadian and Singaporean bankers. “A number of the banks came in and said what’s going on in the Ukraine? With the chaos in Thailand? They were following it hour by hour,” he says. “The people that I talked to hadn’t seen anything like this in a while. And they hadn’t anticipated all of these things happening at once.”
That can make it difficult to separate winning emerging markets from those with deeper problems.
One way is figuring out the degree of exposure to two of the biggest current events in the global economy: One being the U.S. taper, the other being China’s slower growth. Mexico, for example, is closely linked to the recovering U.S. economy and manufacturing, while commodity-exporting Indonesia has significant exposure to developments in China.
Another thing to look for is ballooning current account deficits and low reserves of foreign exchange, two things that unite Turkey and South Africa, says Capital Economics’ Mr. Shearing – who also names Chile, Peru, Thailand and Brazil as countries to watch carefully for signs of the troubles spreading further. On the other hand, the Philippines has run a current account surplus every year since 2003, allowing its central bank to keep interest rates low in order to encourage growth. India, though it narrowed its high current account deficit by banning gold imports, is nevertheless heading into an election – like both Brazil and Turkey – that has prompted concerns of policy paralysis at a time when economists say slowing growth requires substantial economic reforms.
For Razia Khan, an economist who monitors the fast-growing economies of Africa for Standard Chartered Bank in London, there is also optimism. “We seem to be caught up in the eye of the storm now, but there is no realistic expectations that this is going to be sustained,” Ms. Khan says. “The reasons why we were positive about emerging markets two or three years ago have not changed.”
Yuen Pau Woo, who heads the Asia Pacific Foundation of Canada, says chaos in emerging markets represents an opportunity for investors to re-evaluate the entire category. “I would love for this to be a turning point in how people think about emerging markets, not lumping them into one big basket of common traits,” he says. “And with China in particular being the most unique and distinctive of them all, not even being deserved to be called an emerging market, but a standalone driver of global growth with its own problems and challenges.”