There’s a whole lot of shaking going on in battered emerging markets. But … it’s a cycle, folks!
So says gutsy, unconventional stock picker and value investor Sarah H. Ketterer.
In an interview with ThinkAdvisor, the co-founder and CEO of Causeway Capital Management, specializing in international, global and emerging markets equities, declares unequivocally that, like all cycles, this one will turn.
For Causeway, with $26 billion under management from institutional and retail investors, the emerging markets upset is a buying opportunity.
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Ketterer, with firm co-founder and president Harry W. Hartford and team, was nominated for Morningstar International Stock-Fund Manager of 2013. Causeway’s 4-star flagship $4.8 billion International Value Fund (CIVVX) delivered a 23.9% return. With five mutual funds, Causeway invests in major equity markets around the world.
Emphasizing a long-term view, Ketterer’s contrarian approach proved successful even in the dark days of the financial crisis, when she invested in stocks that others fearfully dismissed.
The Pasadena, Calif.-born Dartmouth MBA, 53, started out at Bankers Trust in New York in leveraged lending and mergers and acquisitions, then opened her own database company before founding the international equity strategy at Hotchkis and Wiley in 1990. Hartford joined her four year later. In 2001, they launched Causeway.
ThinkAdvisor talked with the high-energy Los Angeles-based Ketterer about her secrets to successful investing and how experience can often be the best teacher — and disciplined investors, the best learners.
ThinkAdvisor: Is it exciting to invest in what others are fleeing from or snubbing?
Sarah Ketterer: That defines investing. If you don’t have your own well-grounded opinion, you won’t make any money. The key is that you’ve got to see something other people don’t — in the company, in its industry, its financial statements — and then take advantage of that. But contrarianism is a byproduct: I’m not going out to be a contrarian.
Emerging markets are troubling. What’s going on?
This is a tough period. Some emerging markets have been so dependent on foreign capital inflows and have incurred so much domestic debt that they’re in a somewhat precarious position. As foreign funds flow out and investors get nervous, an imbalance is created, and the countries that are suffering have to attract capital back.
How do they do that?
By raising interest rates. But this has a dampening effect on their economic activity. So in some cases, growth is slowing to a crawl – certainly in Turkey and Hungary, and maybe Brazil, South Africa, Indonesia and India as well. Because interest rates had to rise to crimp this excess in credit and support the domestic currency, the economy stagnates, and growth slows; yet they still have inflation problems.
What does all that mean to the emerging markets investor?
This is a cycle. That’s what people forget. We’ve seen it over and over again, perhaps most vividly in the late 1990s in Asia. There will be some adjustment. The countries that come out of it OK are the ones that have natural resources — assets — like South Africa and Brazil. Turkey, on the other hand, doesn’t have much, though in contrast to China, they do have a very young working population, a huge asset.
Is now a good time to buy emerging markets?
It might be a little bit early to be buying more emerging — but not too early. The problem with buying something cyclical is that you never know where the bottom is. Emerging markets look very cheap on almost every measure whether it’s dividend yields, price-earnings ratios, return on capital. So if you’re an investor who understands how to buy cyclical stocks or markets, this may be a good time to start accumulating because the cycle does turn. That way, you’ve bought at a low entry point as opposed to waiting till there’s good news, in which case, it’s too late because the valuations will have re-rated upward again.
So the current situation is a buying opportunity for you?
We think so. Emerging markets are generally growth markets, and investors are typically willing to take on more macroeconomic and political risk to get access to that growth than they would in the developed world. You have to dollar-cost-average your way in. Every couple of weeks we allocate a little bit more to emerging markets because we know the valuations are attractive — but we don’t know where the bottom is.
Is that strategy in sync with your being a contrarian?
It’s in sync with experience. We’ve seen this before.
Some financial advisors tell clients that emerging markets are very risky, so they should buy them via ETFs.
(Laughs) That’s ridiculous! An [exchange-traded fund] is simply a passive allocation to an emerging market. Whether it be active or an ETF, the key is not to take on too much risk in any one market. In our Emerging Markets fund, we have a very broad allocation across a variety of markets and constraints relative to market weights in the benchmark of the Emerging Market Index.
Where does the real riskiness come in?
We take our bets in stock selection, where we’re experts. But one needs to be somewhat careful about loading up on Russia or India, for example, because it’s very difficult to determine the next political change; and that could have an overwhelming impact on the stock. Even if the valuations are attractive, the stocks may go down much further if the political environment becomes less sanguine.
What’s your outlook for emerging markets?
We’re more optimistic on some than on others. China is the one fly in the ointment. We’re somewhat neutral on our expectations for the Chinese economy if it’s going to be a slow, gradual shift from one that’s been very export-oriented to an economy with more domestic consumption. This shift has already started, and it means that we’re in a slower growth environment.
Why are China’s problems so significant in the grand scheme?
It’s such a large component of emerging markets and has demand for commodities and energy. Three-plus years ago China’s growth was in the double digits; now we’re looking at real GDP growth at somewhere around 7% to 7 1/2% at best, with an aging population — byproduct of the one-child policy — and a tremendous amount of private-sector debt.
It all can’t come crashing down because China runs a closed capital account — so the country can hide a lot of this excess credit. But as interest rates need to be higher to squeeze out some of the excess lending, that will slow growth even further. And the slower China grows, the more problematic it becomes for the global economy, as well as for the domestic political situation, which we think depends very heavily on job creation and an ebullient economic environment.
What’s the worst-case scenario for emerging markets?
We’re not looking for a blowup in any place expect for those that are already disasters, like Argentina and Venezuela.
What’s a bright spot?
Turkey has doubled its short-term interest rate. That may lead to companies who borrowed having more trouble repaying their loans. But this will quickly resolve the credit-excess problem and should put the country back on a much healthier plane within the next 12 months.
What’s the secret to your funds’ outstanding performance?