Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Salman Siddiqui, Manager of the Old Mutual Global Emerging Markets Fund.
Hi, Salman.
Salman Siddiqui: Hi. How are you?
Wall: Very well. Thanks. How are you?
Siddiqui: Yeah. Good. Thank you.
Wall: So, it's been an eventful week this week. Not entirely unsurprising news, but Trump has announced new tariffs on China. The trade tariffs, trade war, China-U.S. story has dominated a lot of emerging market coverage, particularly Asian coverage this year. How concerned are you by this sort of latest development?
Siddiqui: So, we always try and take a step back and think about how does this actually impact the economy and how does it impact the companies that we own. So, this latest round of tariffs will be 10% on $200 billion worth of exports, which is, around 40% of China's total exports to the U.S., 7.5% of their exports as a whole. And we estimate this will be about 1% impact to GDP.
So, when we then think about, okay, so, how will this 1% impact to GDP impact the whole economy. It won't be uniform, of course. It will impact those companies that are exporting, naturally. Therefore, it's going to impact those companies that are producing stuff to export.
Now, we are interested in – and we don't invest in any of that – what we are interested in is companies that are producing stuff that is consumed domestically, because that's where we are interested in, actually the domestic demand story within China.
Wall: And China obviously is a very large player within the global emerging market index and indeed, universe. But it's not the only global emerging market that's come sort of under fire this year. Russia, Latin America, Turkey have all sort of generated negative headlines.
And in turn, because of contagion global emerging markets across the board have been hit. How do you invest in an environment like that where actually prices are not necessarily reflecting fundamentals?
Siddiqui: So, we obviously always stick with fundamentals. Because, as you say, prices will come and go. And when we look at emerging markets as whole – I mean, you mentioned Latin America and Turkey. So, obviously, with the tightening of financial conditions in the U.S. that's meant that there's less availability of finance and the finance that is available is now more expensive.
So, countries that have higher current account deficits like Argentina, like Turkey will obviously struggle to finance their very high deficits. And those two countries in particular have really suffered a lot and their currencies are down 40%, 50%, respectively. We don't have any of our fund in Turkey and Argentina. I mean, they are quite small markets when we think about EM as a whole.
And actually, when we look at the rest of EM, most economies are actually in a much better shape now than what they were back in, say, 2013 when we were all worried about taper tantrum. The rest of those fragile five countries like Brazil, South Africa, India, Indonesia, actually their current account positions are much less vulnerable than what they were.
Wall: But despite that they have all felt the heat of what's gone on this year. Do you ever have to reassess and think actually contagion risk is so much that we will reevaluate the decision behind investing in something or do you just hold fast?
Siddiqui: I mean, we are very bottom-up. So, we will be looking for companies that we think can generate high returns over the cycle, that have strong robust business models that – they are not leveraged, they don't require funding and hopefully, that have some kind of strong, Warren Buffett would say, moats that can enable them to sustain those high returns over the long term.
And when you look at some of these companies, I mean, just take some of the big Chinese names, Alibaba – I mean, they are down actually 25%. When you think, okay, are people in China really going to suddenly buy less online? I mean, these are global trends and it's going to happen. I think what we've seen now actually is a lot of really high-quality companies are now 20%, 30% cheaper.
Wall: Salman, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
