Investors who attended the Morningstar Investment Conference in Chicago last week heard many unusual opinions from leading fund managers. Steve Romick of FPA Crescent, for example, recommended buying farmland--if you can figure out a way to do it.
But nearly all of the international-fund managers who appeared on conference panels tended to agree with the consensus on one subject: China's enormous growth rate continues to make it an attractive place to invest. And they noted that other emerging markets demand attention as well, as such countries are in many ways healthier than the United States and Europe.
Who and Why
Mark Yockey, manager of Artisan International, made no bones about it. "We like China a lot," he said, citing the "tremendous boom" in infrastructure spending as one attraction. However, two online stocks also stand out for him. One, search engine Baidu, is nowhere near cheap right now, Yockey conceded. But he said its extremely rapid growth rate made it worth the price. He also likes Ctrip.com, an online travel service, which he says is "generating a ton of cash."
On the bond side, Michael Hasenstab, who runs Templeton Global Bond, dismissed the concerns of those strategists who worry about recent moves made by the Chinese government to dampen the spike in asset prices. He considers such activity a positive sign for China, because it shows the government is being pre-emptive rather than passively standing by as dangerous bubbles develop. Hasenstab concedes that China's rate of economic growth will slow, but as the decline will take the rate down only to about 9%, he argued, "that's not a hard landing."
Rob Gensler of T. Rowe Price Global Stock also noted China's "stellar" growth rate and pointed out that stock prices there had fallen sharply this year, making it more likely that bargains could be found. Meanwhile, Yockey and Wendy Trevisani of Thornburg International Value pointed out that one can also profit from China's growth by owning stocks outside of that country. Two that Trevisani mentioned--both of which are in her portfolio's top 20--are Japanese construction firm Komatsu and LVMH of France, which makes Louis Vuitton luxury goods. Both have substantial exposure to China, as well as other emerging markets.
The Dissenters
Not everyone at the conference was ready to jump on board the China train. Daniel O'Keefe, co-manager of Artisan International Value , appeared on a different panel than Yockey (the two Artisan funds are run completely separately). O'Keefe said that as a value investor, whenever he hears extreme enthusiasm he starts looking for the risks. And in China, he cautioned, "it's not all sunshine and roses."
On the contrary, he pointed to a "capital spending boom without parallel in the history of the world," and said of the immense amount of lending that financed that boom, some is bound to go bad. In addition, O'Keefe has concerns about the effect on China of the sluggish pace of economic growth in the United States and Europe. He believes that while rising consumption in China itself can take up some of that slack, it can't take up all of it.
Another speaker at the conference, Charles de Vaulx of IVA Worldwide, took a swipe at China in passing. In response to a question about his fund's large stake in Japan, whose companies are notorious for a relatively weak commitment to openness and shareholder rights, De Vaulx said one reason he likes his Japanese stocks is that they offer a "backdoor" into China. He'd rather hold a Japanese company getting much of its revenue from China, he said, than pay twice as much for a Chinese company whose corporate governance is likely to be even worse than that of the Japanese firm.
Enthusiasm for Other Emerging Markets
Brent Lynn, manager of Janus Overseas owns some Chinese stocks, but for years his fund's most noteworthy country exposure has been its large stake in India. It seems that isn't likely to change. "India remains my single favourite emerging market," he declared at the conference. He argued that India's political and economic scenarios had made a fundamental shift in a positive direction, and he is impressed by the "entrepreneurial spirit" of the country's businesses.
The second-biggest holding in Janus Overseas' portfolio is Reliance Industries, an Indian conglomerate, and Lynn's enthusiasm for that firm remains strong. He said its management has repeatedly found new ways to create value, and that the company has "tremendous opportunities" to benefit from the vast expansion of Indian infrastructure. He still thinks it's selling at an attractive price.
Trevisani and others also mentioned opportunities in Brazil, which won't surprise most readers, given that the country's growth rate has attracted almost as much attention as those of China and India. Meanwhile, Rudolph-Riad Younes of Artio International Equity, in an interview with Morningstar at the conference, cited Russia as a current favourite, with his main focus on consumer-oriented firms rather than the energy giants more familiar to international investors.
Younes also mentioned China and India, saying that, like Lynn, he's bought some companies that will profit from the big expansion of infrastructure spending in India. And unlike most of his peers at the conference, he pointed as well to Africa, saying that increasing spending by consumers in that region is beginning to help the fortunes of selected companies there just as it has in other growing economies.
