READY TO RE-EMERGE
Christine Tan, chief investment officer, Excel Funds, on why the time is right to get back into emerging markets
TO MANY CANADIANS, emerging market investing is for risk-takers who can stomach losing a few bucks in unfamiliar lands. Christine Tan, however, sees things differently. The Malaysian-born portfolio manager has spent the past four years traversing the globe and has seen just how much these nations have grown up since she lived in Asia.
While emerging market indexes have been on a wild ride over the past few years, she thinks a number of developing nations are on the cusp of great things. Indeed, now is a perfect time to get back into this forsaken asset class. “I grew up in an emerging market, so I’ve always been exposed to it,” says Tan, the chief investment officer at Excel Funds. “I’ve seen how it’s changed.”
Despite her background, Tan is a relative newcomer to emerging-market investing. She has spent most of her career focused on Canada, first as an investment banker working on mergers and acquisitions at TD Securities and later as vice-president and portfolio manager at Gluskin Sheff + Associates. Ira Gluskin, a now legendary investor, was her mentor. The two of them managed the firm’s Canadian equity portfolio.
She left Gluskin in 2011 to manage emerging-market funds for Excel. Investors’ demand for so-called BRIC equities had been growing fast up to that point, and Tan figured the job would be more exciting. “Canada will always be a secure market, but it doesn’t have the same growth trajectory,” she says. Her start at Excel, however, coin- cided with a retreat from emerging markets. China’s growth was slowing, commodity prices began falling and many countries were dealing with political strife. But as Tan learned more about these regions, her enthusiasm did not dim. She noticed, for example, that half the population of the emerging world is under 26. When those people start working and spending, their nations’ economies will speed up, she says.
As well, many countries have low GDP-per-capita levels, which should expand as their populations age. India’s GDP per capita, for instance, is about US$1,700, while China’s is approaching US$10,000. This tells Tan that India has more room to grow.
One major change she has seen in many of these countries, especially in Asia, is the rising importance of the domestic consumer. For many years, developing nations grew their economies on exports alone, which made them dependent on other countries. Now, many are expanding from the inside. “Two decades ago, if the U.S. slowed down, emerging markets would slow down many times faster, because they were so dependent on selling to America,” she says. “Now there is a resilience from that domestic component of growth.”
Of all these factors, what excites Tan most is the rise of a pro-business attitude in developing countries. India just launched a major tax reform, replacing some 27 different state taxes—which make it extremely difficult to sell goods between states— with a much less confusing goods and services tax. Indonesia’s government passed a tax amnesty bill that will charge people just 2% to 5% on money held outside the country, with the aim of bringing about US$45 billion back within its borders to boost the economy. “I never expected to see these kinds of far-reaching reforms at this point,” Tan says.
One frustrating aspect of emerging market investing is the speed with which investors pull out of these countries at the first sign of any bad news. At the beginning of the year, fears over China’s growth caused a number of markets to fall, but now that there’s less chatter about the Red Giant, stocks have climbed again. Between Jan. 1 and Jan. 21, when China was in the news, the MSCI Emerging Markets Index fell by 10.5%. It’s appreciated 28% since.
That volatility makes it hard for
“I never expected to see these kinds of far-reaching reforms”
investors to capitalize on growth, but if those who believe in the region can be a little more patient (as they’ve had to be for years), then smoother and higher returns should come. Why? Because of domestic spending. In a decade, those 20-somethings will be in their 30s and, as in Canada, should have more disposable income to spend. If that plays out, “then you’ll see a dramatic change in the volatility profile of these countries,” Tan says.
Those who want to invest now or on the next dip should consider Brazil. While it has experienced some major problems, in August it ousted president Dilma Rousseff, who was accused of inflating a budget surplus, and replaced her with a seemingly pro-business politician who has promised to get the country’s soaring debt under control. Tan is also keen on India. In 2014 the country elected its first majority government in 30 years, and president Narendra Modi has been actively implementing progrowth reforms. Tan also likes Indonesia, again because of its pro-business leader, Joko Widodo, and the reforms he’s making there.
Before Tan invests, she ensures a country has a stable or improving macro picture. Then she looks for secular growth themes. She likes health-care and education stocks, and thinks consumer staples, autos and housing will fare well, too. When looking at individual companies, Tan feels a good management team is crucial in these often unpredictable environments. She also focuses on return on invested capital and return on equity—she wants to own companies that can actually earn more than they invest. This approach is especially important in emerging markets, she says, where the cost of capital is much higher than in Canada. In India, for instance, a company might have to pay 7% interest on the money it borrows, so its returns need to be high.
Tan knows it will take a while before her expectations for these markets are fully realized, but she’s in it for the long haul. Regular visits with family have allowed her to see Malaysia grow up. “I have observed first-hand what has gone on in Malaysia over the past four decades,” she says. “That makes me believe future global growth will increasingly be driven by these emerging economies.”