As part of our PM Insights series, Justin Leverenz, Director and Portfolio Manager of Emerging Market Equities, shares his latest perspectives on emerging markets upon his return from a recent trip to the region.
The following are highlights from his conversation with John McDonough, Head of Distribution and Marketing:
1. On China
I believe China embodies one of the world’s most endurable growth stories—particularly the most among emerging markets—even though it’s not necessarily what everyone reads about in the news.
China’s recently published its quarterly gross domestic product (GDP) number, which exceeded expectations. Yet there’s talk, for example, of the country’s excess capacity in corporate debt. We’ve been hearing such caveats to China’s impressive growth figures for years—and I think it’s because China’s economy is largely misunderstood.
In my view, China has exhibited one of the most impressive levels of social mobility and rising standards of living. It is, to the best of our knowledge, one of the only countries with a genuine middle class that’s growing. Its productivity and savings rates are high. Entrepreneurship and creativity in the country have been unleashed, rivaling such worthy competitors as Silicon Valley and the Boston corridor.
In all, I’m not concerned about China’s underlying growth conditions in the foreseeable future.
2. On Emerging Market Tech Companies and Their U.S. Competition
What we’re seeing in the technology sector is the emergence of oligopolies—at least in terms of ownership of data. For example, in social media we have Facebook; in commerce and search we have Google; and Amazon participates in multiple market segments with its expansion.
I find Alibaba noteworthy in understanding and capitalizing on the data revolution—and we’re beginning to see that in terms of how the company is monetizing its use of data.
Oligopolies are becoming an issue all around the world. In Europe, for example, they’ve drawn the attention of regulators, though they’re not raising any concerns in China—a country that already has a monopolist political party that finds corporate oligopolies easier to monitor.
The power of such companies as Alibaba and Tencent is very difficult for people in Silicon Valley to comprehend because of their sprawling presence and large ecosystems. I believe companies of this sort will surprise significantly on the upside in the next few years.
3. On The Inclusion of China A-Shares in the MSCI Emerging Markets Index
Currently, China represents roughly 25%–30% of the index, but many investors are underweight relative to the index because of what I see as a lack of confidence about the country’s prospects.
Yet the A-share market is continental in size, dwarfing its developed-market counterparts in terms of underlying market capitalization and trading volumes. I believe MSCI’s inclusion of A-shares was inevitable—and only the first step on a journey of recognizing the extent of China’s market and its emerging siblings.
4. On the Transparency of Economic and Business Data Published by China and Other Emerging Markets
With respect to China, the big question on many investors’ minds is trust: Can data coming out of China—whether economic or business-related—be trusted? Is it being manipulated? How do we as investment managers treat this data and make decisions on the basis of it?
Our answer: In all markets in which we invest, there are issues with data collection and representation. A good illustration of the problem is India—an emerging-market darling for many. India posted very high GDP growth figures last year. Yet you would find them difficult to square with the underlying data in terms of retail sales or capital formation, which have been cyclically bearish for the last three years.
We see similar issues with China. But I think that the underlying integrity of China’s official macroeconomic statistics is fairly strong. In fact, China provides additional granular data about its economy that other countries don’t. The bottom line is that China accounts for roughly 30% of the world’s growth—and I foresee it continuing to be a major growth engine for many years.
The problem with I see with China isn’t the macroeconomic statistics it publishes—despite how preoccupying they can be—but rather how similar it is, in some respects, to the United States. The challenges of both countries stem in large part from their governments. Their state-owned enterprise sectors, for example, exhibit inefficiencies in deployment of capital. It’s paradoxical, because the U.S. and Chinese economies are large and vibrant—with strong entrepreneurial forces and disruptive creativity. So, it seems as if government is “behind the curve,” so to speak.
5. On Geopolitical Risks in Emerging Markets
In my estimation, political risks in emerging markets are probably higher than what bond investors are paying for. We’re living in a low-interest-rate environment that has encouraged some investors to take on too much risk in search of yield—and thus accept lower yields in emerging markets than they should be getting.
But that’s my macro view. On a micro level, my focus hasn’t changed: My team’s job is to identify quality companies with durable advantages and a compelling host of prospects that would hopefully materialize over many years.
6. On The Performance Divergence Between Small and Large Caps in Emerging Markets
Year to date, we’ve seen small- and mid-cap stocks of emerging markets outperform large caps in developing markets. This is partially due to the recovery of mid caps, which have rebounded from their difficult period last year. But we believe there’s still room for upside through mean-reversion—especially in today’s “risk-on” environment.
7. On OppenheimerFunds’ Emerging Market Equity Franchise
My two main objectives outside of running the Oppenheimer Developing Markets Fund and the Oppenheimer Emerging Markets Innovators (EMI) Fund are:
a. to propel EMI to become a leader in its category; and
b. to develop a world-class team alongside our Developing Markets Fund.
Toward deepening the talent bench of the Developing Markets Fund, we’ve recently added a few experienced investment professionals to our team and are building out our infrastructure and processes.
I also believe that we will continue to seize on opportunities in China as they emerge—and as China’s economy continues to develop.
Follow @OppFunds for more news and commentary.
Oppenheimer Developing Markets Fund holdings as of 6/30/17:
Alibaba Group Holding Ltd.: 6.3%
Tencent Holdings Ltd.: 5.9%
The mention of specific companies does not constitute a recommendation by any particular fund or by OppenheimerFunds, Inc.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Eurozone investments may be subject to volatility and liquidity issues. Investments in securities of growth companies may be volatile. Mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a mid-sized company, if any gain is realized at all.Investing significantly in a particular region, industry, sector or issuer may increase volatility and risk.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.