Semple: Constructive on Emerging Markets

David, thanks for being here.

David Semple: Thank you for having me.

Burns: So, David, you did a presentation on the emerging markets. It's a great theme in ETFs. People can now play them either as a broad basket or separately on countries and even small-cap countries. But, you know, you really come from the actively managed side of Van Eck, and you know the reason we asked you to come is to actually talk about from a professional investor's perspective, where are you seeing opportunities in emerging markets today.

Semple: Broadly speaking from the top-down, we're pretty constructive on emerging markets, and I think one of the things to bear in mind is that if you believe in some element of the "new normal" where growth is constrained around the world. The relative growth premium of emerging markets will I think be reflected in the stock market premium of emerging markets.

Traditionally, they've traded a discount to developed markets--[and have been] perceived to be riskier. I think that will change. I think they will become less risky as the capital markets broaden and deepen. And a reflection of the actual growth that they can have compared to developed markets will argue for the flows into emerging markets still being strong as we go forward.

Having said that, they have been fairly popular; expect that to continue. So we're pretty constructive from the top-down.

Burns: And it’s interesting when we look at yesterday's emerging markets or 10 years ago emerging markets to today's, there has been a very sizable change in the makeup of those indexes, and really the privatisation of those large government-owned enterprises, companies like China Mobile and Petrobras, and a lot of the big Russian metal companies. How has that really changed your approach to looking at emerging markets?

Semple: Well, the first thing that happened was when the countries became investable: if you look back 20 years, you didn't have China, you didn't have Taiwan, you didn't have Korea, you didn't have India, so it's actually changed radically from 20 years ago.

But you are right. One of the interesting things has been the listing of some of these state champions. But that’s at the large market cap level. At a level below that, you've had a much wider range of types of companies investing. So that's a supply side of the equity, which is interesting and there is much more of a palette for us to paint from that.

But on the demand side of an emerging markets, within emerging markets, that's equally important. So, you've seen the development of life insurance industry, pension funds, high net wealth managers, private bankers and so forth--a much wider range of guys investing in these markets with different mandates, different views, different philosophies, and that argues for it being a less of an opportunistic asset class, where it's all-in or all-out, and more of a subtle type of approach to emerging markets.

Burns: When you look at any single countries right now, are there any areas in the emerging market space that seem more ripe, either more opportunity to grow or more underpriced, from your perspective?

Semple: Well, it's funny that you should mention "ripe." One of the descriptions of some of the Southeast Asian markets has been that they are very ripe, as in ripe mangoes, simply because they have done very well this year, particularly Indonesia has done very, very well, currency and stock market. There are solid structural reasons for that; the politics has gotten a lot better, interest rates have come down, and there is a feeling of confidence about the place which was not necessarily there. They were hurt badly during the Asian crisis, and it has taken a long while for them to get their mojo back, if you like.

So that area and some of the other areas around Southeast Asia have done very well; Philippines, new government there; Thailand has got over it troubles, so again that's bounce-back somewhat.

The biggest issue for most people is China, and the biggest misunderstanding I think is China. I'm not starry-eyed about it, but I think the problems are grossly exaggerated, and it will engineer a successful soft landing as it withdraws the excessive stimulus.

We like Russia, but we like Russia in terms of the non-hydrocarbon place. The hydrocarbonish companies, the oil and gas companies, have issues with tax, which are going to make it difficult for them to invest profitably in greenfields unless the tax system is altered. But the rest of Russia is picking up nicely now after being relatively slow to pick up.

Brazil is still one of our favourite markets, less so Mexico. Mexico clearly has the political issues, drug war issues. But it also is a very close reflection of what's happening in the U.S. And unless you see a strong rebound in the U.S., then it's probably not the place to be.

Burns: They are too connected.

Semple: They are very connected with the maquiladoras and so forth.

In Africa, South Africa would not be perhaps our most favourite play. Great companies, big grown-up management, very serious companies; however, I think the operating environment is not as good as it could be and overall probably the rand, in my view, is overvalued.

Burns: Do you think that's mostly due to the rising price of precious metals and other commodities that South Africa really produces?

Semple: Well, the rand at this price is going to make it somewhat difficult for the higher-cost producers there. That's something that we are definitely looking at as various issues. It's not just that. It might be some mining taxes or more explicit development of the economic empowerment initiatives that they have in South Africa and electricity price going up, all these things raise the cost curve for some of those commodities--or it might be grade issues, for instance, in copper there are some grade issues going forward over the next couple of years. So that's raising the cost curve on that.

Burns: Especially with the low-cost providers like Russia, kind of knocking at the door and putting that pressure on.

Well, David, thanks for your time and thanks for going through that very thorough roundup of the emerging-markets opportunities and challenges.

Semple: You're very welcome.

Burns: And I'm Scott Burns with Morningstar. Thank you.