Scaling the emerging markets landscape

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<p><strong>Lex Hall:</strong> Hi, I'm Lex Hall for Morningstar, and welcome to another edition of "Ask the Experts." Today I'm joined by Rohit Chopra, who co-manages the Emerging Markets Equity strategy at Lazard Asset Management. We're going to talk about the trade war, its effects and see where some opportunities and some risks lie in the emerging market space.</p> <p>Rohit, thanks for joining us.</p> <p><strong>Rohit Chopra: </strong>Thank you, Lex. Thanks for the opportunity.</p> <p><strong>Hall:</strong> There was a glimmer of hope overnight in the last few days in the trade war, do those kind of things &ndash; are you cynical about these kind of developments or do you&hellip;?</p> <p><strong>Chopra: </strong>Well, I think the most important thing is to have awareness across the capital structure, you need to do scenarios in terms of your bottom-up analysis. Even investing in emerging markets, you're not buying India Inc., Brazil Inc., or China Inc. you're actually investing in companies that happen to be based in the emerging markets. And we think it's really important in assessing those bottom-up opportunities to have a framework to look at issues like trade war and macroeconomic risks.</p> <p>My personal view is that these issues are likely to be topical for the long being &ndash; for a long time. I think that there are some national strategic security issues that are in play, particularly around 5G and technology and sort of the next sort of "fourth industrial revolution" around technology. But, yes, it is definitely, I think an opportunity also for us to identify compelling businesses.</p> <p><strong>Hall:</strong> OK. Let's talk specifically for a moment about some of the big names, Chinese companies; Alibaba, Tencent; not a Chinese company, Taiwan Semiconductor&hellip;</p> <p><strong>Chopra: </strong>Sure.</p> <p><strong>Hall:</strong> &hellip;Manufacturing, how do you think they fit? They've had a rough ride do you think recently or ...?</p> <p><strong>Chopra: </strong>Well, I think they have very different businesses. So, prior to even the trade issue, you have seen a slowdown in the manufacturing context for smartphones. So that has had an impact on the more semiconductor memory manufacturers.</p> <p>In terms of the internet companies like Alibaba and Tencent they have very compelling business models, actually, we think that they are going to be long-term winners. With that said, we actually don't have investments in our relative value strategy there. We don't believe that those companies are significantly mispriced; we're really trying to focus on financial productivity and the valuation that one is paying for those. Our goal is not to necessarily buy growth companies that may necessarily be generating superior levels of profitability, but really buying those &ndash; investing into businesses, where we think there is a fundamental mispricing.</p> <p><strong>Hall:</strong> Let's talk about your methodology. You travel a lot, and one of your strengths is that you spot good picks that other companies may be overlooking. What are some of the strategies that you do to &hellip;?</p> <p><strong>Chopra: </strong>Well, I mean, I don't think that we necessarily always spot great picks. I think one of our greatest advantages is that we represent long-term money. We have a framework that we think allows us to go beyond sort of short-term market noise and focus on those fundamentals. At Lazard, we have over 70 people that spend 100% of their time focusing on the emerging markets. And what's important about that they are across the capital structure. So, I have colleagues that spend time focusing on the dollar debt, the corporate debt, the local currency. And that's really helpful because as we know, sometimes political or macro events can impact the underlying equity that we may be investing in. So, our framework is really to focus on what we describe as financial productivity and valuation. And what is financial productivity? For us, it's really the decomposition of return on equity. So, what is the company generating in terms of sales and profits? How capital-intensive is that business? And how do they think about capital structure around leverage? These are all three key important components of what we describe as financial productivity. And we're trying to balance the two when it comes to valuation.</p> <p>All else equal, we believe a business should be worth more if it can offer high and sustainable levels of financial productivity.</p> <p><strong>Hall: </strong>OK. We'll talk about some specific names in an upcoming video, but bright spots in certain regions, where would you nominate?</p> <p><strong>Chopra:</strong> Yeah, so I think some of the bright stars is that there's a lot of value out there. So, for example, in the Russian market, we find the anomaly where dividend yields are higher than P/E multiples and we're not in a crisis environment. I mean, today, Russia can go out and buy back its sovereign debt, its corporate debt and its individual debt. Essentially, from a perspective of a balance sheets, say, at a net cash position. They've had to deal with the challenges of sanctions and their access to long-term funding. But that is all meant that there are companies that are actually going to become unintended winners in this environment, and we can we can identify those.</p> <p>In Brazil, for example, after a very difficult recession and, obviously, they got their growth wrong. You're starting to see a bit of recovery from one of their most difficult recessions in recent period. They're implementing now a &ndash; are in the process of implementing a Pension Reform Act. If passed, it's about $240 billion that will go back into investing in the economy. There's plans to kick start the privatisation program in the country. So, I think there's always opportunities that present themselves. And the reality is that very often, when investors get so focused on the headline risks, they sometimes throw the baby out with the bathwater. And I think that's where we're seeing today an environment where, on the margin, where you want to be focused is not in those quality at any price type businesses, which have been rewarded. And because there was so much fear out there. Medium to long term, we're starting to see some of those fundamentals improving and they happen to be in some of those more economic &ndash; slightly more economically sensitive areas. The financials, for example, is an area where in EM nonperforming loan is at peak. We're starting to see a rebirth of lending and animal spirits in certain parts of the markets coming back.</p> <p><strong>Hall: </strong>OK. Rohit, thanks for your insights today.</p> <p><strong>Chopra: </strong>Thank you. Thanks for your time.</p> <p><strong>Hall: </strong>I'm Lex Hall for Morningstar. Thanks for watching.</p>

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