Has the Russia/Ukraine war impacted your thinking?
Daniel Graña: The Russian/Ukrainian war has exacerbated inflationary pressures, which of course has a knock-on effect on emerging markets. We were already seeing commodity pressures before the war, but you have to keep in mind that Russia basically exports the entire periodic table: palladium, nickel, carbon in the form of crude oil, natural gas. And so those prices are heading even further higher because people have to scramble to look for alternatives instead of buying from Russia. And then of course they damaged the export capacity of Ukraine to export fertilizer and wheat, so food commodity prices.
But in emerging markets, we're not a monolithic asset class. There are some countries that benefit from higher commodity prices, mostly Latin America and EMEA. And there are some regions in emerging markets, such as Asia, that are net commodity importers, and so they tend to be hurt by higher commodity prices. Nevertheless, you have to keep in mind that, in the CPI (Consumer Price Index) baskets, the inflationary baskets in emerging markets, that food and energy prices are disproportionately large in their baskets because of where we are in the economic development of these countries. And that does mean that central banks in emerging markets probably need to contend with that inflationary pressure.
So I would say it's a mixed bag, that, unfortunately, the situation in eastern Europe has led to greater inflationary pressures and has benefited some countries but also has hurt others in emerging markets.
What opportunities should investors consider in emerging markets today?
Emerging markets are evolving. Emerging markets opportunities are evolving. We're not just an outsourcing story, we're not just a converging story. We're also now about innovation. And the exciting thing about innovation is that emerging market companies are playing a leading role, not just making widgets, or not just seeing the benefits of innovation arriving late. [They’re] playing a leading role in this next wave of innovation and in helping to solve EM-specific frictions. So, think, 60% of the Mexican population doesn't have access to banking accounts. FinTech helps solve that. There's unequal access to health care in India; hospitals and clinics are not where they need to be. Telemedicine can help bridge that gap. And so there's a lot of innovation in emerging markets that gets us very excited. And certainly there's some short-term pressures related to the [Federal Reserve] Fed and question marks about China and COVID, but if you look a little bit beyond, widen the lens somewhat, you get very excited about these kinds of opportunities.
Is China Investable?
China is not investable… unless. Unless you're willing to incorporate not only corporate governance but political governance as part of your due diligence. Corporate governance, I think everyone accepts that it’s a key part of investing in emerging markets. Accounting Standards are different, local SECs are not as robust, acceptable business practices are very different. And so understanding the motivations of the controlling shareholder – and inevitably in emerging markets, there is a controlling shareholder; it’s usually either a state or a family. But understanding those motivations are important. But you have to respect the rules of the road that you're investing in, and is the country that you're investing in a rule of law country or is it a rule of party?
And so respecting the rules of the road means that you have to understand, is there alignment with the objectives of the Communist Party? And the Chinese Communist Party is looking for innovation, decarbonization and common prosperity. Companies that are not helping the Chinese government achieve those goals are seen as politically incorrect. And so therefore, when investing in emerging markets, you need to layer on this part of the analysis, otherwise you will be surprised. And so in investing in emerging markets, but especially in places like China, you need to think about not only is this the right company with the right strategy in the right sector in the right valuation; you also need to consider things like political governance.
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