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Emma Wall: Hello and welcome to the Morningstar series, Market Reaction. I'm Emma Wall and here with me today is Gerardo Rodriguez, Portfolio Manager for the BlackRock Emerging Market Group. Hello Gerardo.
Gerardo Rodriguez: Hello. How are you?
Wall: Very well. Thank you. So, we are running an Emerging Markets Week this week and one of the things that we're increasingly finding in our studies is that emerging markets once considered a homogeneous group are increasingly not so. The things that drove the emerging markets to profit over the last sort of 15 years are actually not the things that are going drive profits over the next 15. Is that correct?
Rodriguez: That is correct. Markets have been struggling for the past two or three years especially equity markets because as emerging economies evolve the income curve it has become a bit harder to continue growing. Once you get beyond certain point of income per capita in order to continue growing emerging economies need to have a strong structural reform agenda and doing that and having that agenda passing through Congress is not that easy. So, this nice pull driven mostly by China, commodities boom and also reduction across the board in trade barriers basically pulled up the economic growth in emerging economies and had asset prices perform very well from the period from 2000 say to 2012. Since then things have been becoming a bit more challenged.
Wall: And those drivers as you say of commodities, of exports, those aren't going to drive the next profits. So, it's about reforms. China is putting reforms in place at the moment, India, with the new Prime Minister, is putting reforms in place. Who else is getting it right, who else is ahead of the curve perhaps?
Rodriguez: Absolutely. So, we're living in a world in which countries for the most part are growing below potential. So, this pull from exports is not necessarily going to be there. That's why this issue of reform, of the structural reform agenda has become more important.
Clearly, China has seeing that a transition from an investment-led to consumption-led growth. There are still a lot of question marks out there with regards to the shallow banking, property markets, the credit boom that has driven economic growth and how to transition that is still something that we have to see.
Mexico, I think it's one of the countries that is at the top of the list from a structural reform agenda. Constitutional reform has been passed through Congress already. Secondary legislation; the same thing. So, it is now the implementation process that the government is going through.
India is another example with the new Prime Minister, very energetic, trying to get things done. A lot of new initiatives on how the government is functioning are already in place. We have yet to see if the government agenda has a congressional expression of its structural nature.
As well there are some questions in the case of Indonesia with a new President there and what type of reform agenda he can push through congress in a context in which things are a bit say complex given the composition of Congress.
Certainly, there are other countries that have been struggling from a macro perspective but have just finished an electoral cycle like Brazil in which we have seen the macro deterioration over the past few years. We have yet to see the appointment of a finance minister there and the willingness of a President who has had to actually change course from a macro perspective. So, as you can see, there are not that many examples of countries doing what's good for the country medium-term even though that has political cost over the short-term.
Wall: What about Europe then? You've touched on LatAm, you've touched on Asia. Europe and emerging Europe is a big part of this emerging markets sphere. Are they getting it right?
Rodriguez: So, that's an interesting question just because of the secular dynamics in which the Eurozone has been evolving over the past few years already and now the deflation fears. We're at a point in which monetary policy divergence in the developed world is becoming a key element for say market dynamics. Clearly, the U.S. in the process of normalising monetary policy while Europe and certainly Japan moving in the opposite direction. So, from a global financial conditions perspective, those countries that are more associated with Europe in the periphery are maybe in a better position, say, from a market dynamics perspective. So, actually some of the countries that we like have to do with say emerging Europe.
Wall: Gerardo, thank you very much.
Rodriguez: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
