Antoine van Agtmael, who is credited with coining the term "emerging markets" nearly three decades ago, invested in the developing world before it was hot. He is the founder and chief investment officer of Emerging Markets Management, with $20 billion invested in emerging-market equities, and author of The Emerging Markets Century. While acknowledging the risks in investing in developing countries and counseling caution, he still recommends that investors put 20 percent of their stock portfolio in emerging markets. He recently spoke with U.S. News.
Is the world's economy tipping in favor of emerging markets?
No question about it. Ten years ago, we had the Asia financial crisis. Today, we have the American financial crisis. Then, those countries needed to be bailed out. Today, emerging markets sit on 75 percent of the world's foreign exchange reserves. Then, they were dependent on the West for money, for management, for everything. Today, we would not be able to function without oil from the Middle East. Our interest rates would be higher without the Chinese to buy our treasury bills. Yes, the world has really changed and is tipping in favor of emerging markets in the sense that you have a group of what used to be very poor countries slowly becoming middle class. We overconsume, and we underinvest. They underconsume and overinvest. They help us make up the difference between what we save, which is not enough, and what we invest, which is also not enough. They help us keep our standard of living.
When will the Third World overtake the developed world?
In 25 years, basically, emerging markets as a group will be bigger than the whole developed world is today. That may sound unbelievable. Before the industrial revolution 200 years ago, China and India were the largest economies in the world. Soon they will again be the largest economies in the world. Before the middle of this century, China will be the anchor economy of the world like the United States is now.
Given the current state of the market, should investors be more wary of volatility in emerging or developed markets?
I think they should be wary of both. I think that there are three big problems in the world for investors. The first big problem is that in the United States in particular we have overconsumed and underinvested, and it's got to stop. We have to bring it into balance. There's a problem in that bankers have been reckless. There has not been enough respect for risk. Now that people have suddenly discovered emerging markets, sometimes I worry that we have entered an age of complacency where people are a little overenthusiastic right now, especially about what we would call sure winners. We have to think about the long run rather than be taken in by market sentiment and fashion. I'm overall right now a bit cautious.
How do you pick an emerging-market stock?
In 1981, people thought I was crazy when I suggested that you should put money in emerging markets. Today, I think we should be careful about the hype. The first question you always have to ask is, "How much do I want to pay for growth?" You want to make sure that you don't say, "It's growing so fast, so I'll just pay whatever it takes." You want to essentially invest in stocks that have the right stuff, that have the potential to be world class, to be a leader in their industry, to be globally competitive. You only want to do it if those stocks are underrated or reasonably priced. We only buy them if they are underrated.
How do you lower the risk involved in investing in emerging markets?
One is you diversity. By diversifying, you mitigate your risk. You never put all your eggs in one basket, especially the hottest basket. Right now the hottest basket is China. We have money in 40 different countries: Brazil, Chile, Mexico, the Czech Republic, Slovakia. We have money in the Middle East: Qatar, Dubai; in Africa: Nigeria, Botswana. If it's really hot and everybody is there and enthusiastic, we go underweight. We try to not be in the middle of the party but a little bit on the side of the party. That sometimes hurts short term, but in the long term, I believe that works better. We don't follow the flows, but we look at fundamentals. Is this stock cheaper than it should be, or is this stock more expensive than it should be?
What are emerging markets doing right that western competitors could emulate?
A lot. One thing is that they have learned to adjust to new realities very quickly, often because they are used to working in what I would call a very unruly environment. They follow what Darwin already said, meaning that it's not the strongest that survive but the one that can adjust rapidly who survives. Rapid adjustment is something that companies can learn from emerging markets.
What challenges do emerging markets still face?
The biggest one is the environment. We are at the moment on a very nice train ride to growing prosperity. It may be that train ride could turn into a train wreck if emerging markets and western countries don't do something pretty quickly about the environment. We cannot go on the way we are in terms of how we use energy, water, CO2 emissions. There is a lot that still needs to be done in terms of transparency, corporate governance, in terms of making sure that people don't only know how to make things quickly and cheaply but know how to make things well.
What areas of the world should investors be attuned to right now?
We have very large investments in the Middle East and Africa, where we have been investing for 14 years. There is in Africa, I think, less volatility and better returns, which is a good combination. We have a billion dollars or so in Africa. We are active in the Middle East and Central Asia. Basically, we want to make sure that we don't get taken in by what is a bit of mania at the moment. People think it's all about China, India, Russia, and Brazil. Those are the leading emerging markets. We tend to go to places where the crowd is a little thinner because then the bargains are easier to find.
