CHICAGO -- Emerging market investors shouldn't yet write off China as a growth market, or Russia or Turkey as profit centers, say portfolio managers.
Indeed, investors predicting the "ultimate demise" of China as a growth market are making a major mistake, argued Justin Leverenz, portfolio manager of Oppenheimer Developing Markets.
"China is the most durable growth story in the world," Leverenz said during a panel here at the annual Morningstar Investment Conference. "Even if China grows at 5% to 6% annually, there's nothing in the world like it. China's been the most extraordinary growth story of the last decade, and it will be for the next decade."
Investors also shouldn't shy away from good companies in countries that may be having short-term macroeconomic problems, Leverenz argued, citing Russia and Turkey as examples. "There are some really extraordinary companies in Russia," he says, "but you have to be willing to embrace the controversy."
Leverenz, whose popular equity fund -- now closed to new investors -- has nearly $40 billion in assets, was the most optimistic panelist at the conference's session on emerging markets. (Oppenheimer is opening a new fund -- Oppenheimer Emerging Markets Innovators -- at the end of June with Leverenz as co-manager.)
Leverenz said he didn't believe in the notion of a "Fragile Five": Brazil, India Indonesia, Turkey and South Africa, so named because of their widening current account deficits.
Developing countries with strong and growing middle classes are forcing both democratic and autocratic governments to make "significant institutional changes," Leverenz said. "Governments have to deliver the goods. Progress is happening, although it won't be linear."
Masha Gordon, who heads Pimco's emerging markets equity portfolio management team in London, wasn't as sanguine, however, predicting that anemic growth of 1% or 2% could lead to the "collapse" of the Russian government.
For now, Gordon said in an interview after the session, Pimco was taking advantage of recent turmoil in Russia by focusing on companies with "high dividend flows" -- despite uncertain medium-term government policy.
COMPANIES VS. COUNTRIES
Loomis Sayles vice president David Rolley urged emerging markets investors to remember that countries are different from companies. "You didn't used to have to know the difference," said Rolley, co-portfolio manager of Loomis' Global Bond team, "but now you do."
Fixed-income value opportunities should emerge when volatility picks up, according to Rolley. Two "volatility triggers" Loomis is waiting for, he said, are when the Federal Reserve Board ends quantitative easing and when China shifts to a "more consumer oriented" economy.
China's neighbor India will also be worth watching, said Leverenz.
The recent election of market-friendly Narendra Modi as prime minister, with a "very clear mandate" to improve the economy, is "just what India needs," according to Leverenz.
"India will be able to grow faster over the next three to five years," he said.
Yet Leverenz added that he was skeptical that India would be able to "break out" the way South Korea or China has without a significant increase in manufacturing.
"India will do well, but I'm not sure it can be Korea or China," he said.
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