Our biggest worry for 2015 is the recognition that, in our experience, shifts in monetary policy direction are usually accompanied by a rise in market volatility, as investors and corporate treasurers coalesce around, and adapt to, a new world view, and shift portfolios and exposures more quickly than available liquidity can easily accommodate. When monetary policies of major economies diverge, the interactions are likely to be more violent still, and that is exactly what we have currently in the opposing directions of the US Federal Reserve and the European Central Bank's signaled intentions. The speed and size of the oil price decline, combined with the breadth of the dollar appreciation, may be merely the first salvos of rising volatility.
Our team concedes to a degree of natural bias towards the Emerging Market (EM) asset class, but our objective view of its current merits is nonetheless leaning towards the positive. The market some time ago fell out of love with EMs and has increasingly focused on the negative fundamental developments, which have been very real and numerous. In recent years, EMs have suffered drought—both in the literal sense of water shortage and also as a distinct shortage in many countries of wise and consistent leadership. Collapsing commodity prices, politically-motivated violence, currency depreciation, and rising competitive intensity have smothered earnings growth—and investor enthusiasm. Only the locusts have yet to arrive. But EMs are not irreparably broken. We see much evidence of life (and even growth) in our companies. Major, positive political change is underway in the three most populous EM countries: China, India, and Indonesia, potentially impacting a cool 2.9 billion people. Shouldn’t we cheer that? The vestigial legacy of a command economy such as China’s is you can still, within limits…command it. The national government may well navigate a bumpy but not disastrous landing out of the property and local government excesses. State-owned enterprise (SOE) reform is a very strong card, as it requires no expansive credit or fiscal expenditure program. Rather, SOEs should be induced to reform largely by legislation, ideally incentivized by stock options. India’s and Indonesia’s growth have suffered due to their inability to build sufficient infrastructure. Those issues may not yet be fixed but at least the right people now have a strong and intensifying mandate to address it. At the stock level, we are excited as EMs once again offer up a diverse selection of attractively valued, high-quality, growing companies, ranging from online travel services in China to generic drug and baby milk producers in Africa and Latin America. The list is impressively long: the nearly 80 names that make up our portfolio.
We build diversified portfolios of high-quality, growing companies identified through fundamental research.