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Window on the world

What strategy would you recommend for investors in this recently volatile asset class?

The best strategy, of course, is diversification. As you know, emerging markets is just one asset category. And you must weight your equity exposure as well as your bond exposure or your fixed-income exposure.

Have emerging market countries learned from past volatilities?

I do not think they have. Emerging market countries are beginning to get more used to volatility simply because it has been with us for quite some time but I think volatility will be with us for ever. The only thing we can say for developed and emerging markets is that they have learned to live with volatility rather than try to change it.

Will emerging markets&#39 growth continue despite the sluggish US economy?

Yes it will and the reason is that the population in emerging markets is so great and is growing at a faster rate than that in the developed nations.

In India, only 5 per cent of the population have telephones. So you can see there is a tremendous opportunity for growth. Admittedly, a large part of the population do not have the money to get a telephone today but their GNP per capita is moving up.

So, as these countries get higher growth rates and as their incomes increase, the demand for domestic goods will increase and the dependence on exports will not be as great. We have already seen that in China.

China, of course, has a very big export business but its domestic economy is growing at a faster rate. We are finding that its consumption of goods and the imports coming into China are quite remarkable.

There have been many high-profile corporate scandals in developed markets recently. What are you doing to protect investors from such hazards?

The first and foremost precaution we take when we think about investing in a company is to visit it and talk to the management and talk to the competitors. We will talk to anyone who knows something about the industry or about that company to get some insight into the ethics of the management. Are they friendly to shareholders? Do they disclose their full information about the company?

We try to ascertain their overall corporate governance system. Then we make some judgement as to whether this is a safe company in which to invest. It is not a science and it is not an easy decision to make simply because it is a qualitative decision. There are no numbers you can attach to these things very easily. But when you see the signs, such as unequal share-voting rights for different classes of shares, this is sort of a red light you have to watch for. It doesn&#39t necessarily mean you might eliminate the company but it is something you would want to look at.

Some investors argue that they can get emerging market exposure through US multinationals doing business in these countries. Is this valid?

Yes, because these multinational companies have exposure in emerging markets. But the problem is that the majority of their sales and profits are in developed markets in Europe, America and Japan. With emerging markets portfolios, we are concentrated only in emerging markets. By investing in emerging market companies that have most of their earnings in those countries, we get full exposure to the growth of these nations.

What is the impact on the Eastern European economies and markets of the recent floods in Central Europe?

There has been some impact, mainly because of the interruption of the flow of goods. Trade has been impac-ted on. On the positive side, the rebuilding that has to be done and the new investment that has to be made to return a lot of these facilities to their original state will be beneficial to these economies. It means there will be more expenditure.

Particularly for the Eastern European countries, where there are quite a few people who work in Western Europe on construction, this will probably have a beneficial effect.

How have the floods impacted on the psychology of investors?

People have asked about the floods in China and, of course, the floods in Europe. But the floods really have not changed the fundamental outlook of emerging markets investors. This is a temporary phenomenon.

Give examples of first-world companies at third-world prices.

A good example is South African Breweries. As you know, it started out in South Africa and dominated the South African market. Then it moved into China where it started a joint venture that has been very successful. They went to Eastern Europe and were also successful there. More recently, they purchased Miller Brewing in the US.

South African Breweries is a good example of a company with excellent management and a very good track record and selling at third-world prices. Another example would be LukOil, the big oil company in Russia. That company, despite the fact that it is a global player, has a very large share of the Russian market and is selling at one-third to one-quarter of what its counterparts in the West are selling at. So, this would be an example of where you have an excellent company with good management but it is selling at third-world prices.


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