Barron's interviews Arjun Divecha, the portfolio manager of GMO Emerging Markets III Fund. Some excerpts:
- Emerging markets were hurt twice by the current crisis, from a drop in exports and from a decrease in the availability of cheap foreign credit. However, with savings rates increasing in many developing countries, there is less reliance on foreign capital than there once was.
- The four countries that should see the biggest recovery off a bottom are Turkey, Russia, South Korea and Thailand. Turkey and Russia are both very cheap in terms of stock market valuations, and Turkey has a customs union which Divecha considers the most important part of access to the EU. In particular, Turkish banks should do well in a recovery, and the country is competitive in sectors like textiles, machinery and auto parts. Brazil looks good but is lower on the list because other countries are cheaper.
- Some of the fund's less favorite countries are China, South Africa and India. The fund is negative on China short-term and long-term. Much of the country's stimulus money is not being used productively. Banks could face a growing problem with bad loans. The government could try to fight a credit bubble by strongly cutting liquidity, which could hurt the stock market.
- The fund is wary about Eastern Europe, which "resembles Asia during the crisis of '97." Many of the countries have too much foreign-denominated debt.
- Longer-term, the fund is bullish on emerging markets, though a recent rally could lead to a pullback.
(The full interview is available here.)
