Morningstar Fixed-Income Manager of the Year winner John Carlson of Fidelity sees more emerging-markets output remaining within such markets over the long term.
John Carlson is a 16-year Fidelity veteran and one of the longest-tenured portfolio managers of emerging-markets debt in the industry. He was also recently named Morningstar's Fixed-Income Fund Manager of the Year for 2011.
As portfolio manager of Fidelity New Markets Income FNMIX, he recently commented on the short- versus long-term view of growth in emerging markets. He also noted how emerging economies' resilience and the speed of fundamental improvements are two of the most surprising characteristics of emerging markets during the last 15 years. Lastly, Carlson is currently finding opportunity in Latin America and Venezuela, but remaining underweight in Europe for the time being.
1. Many investors are becoming increasingly worried about global growth. Are you worried about a developed-world recession hitting emerging markets? Why or why not?
Emerging markets have made great strides during the past several decades in part because of greater linkages with the developed world. This means that decoupling of the developed and developing world can't happen completely. So what happens in the developed world will still affect what happens in the emerging world. The good news is that with economic growth having declined globally, inflationary pressures in the developing world have begun to subside, and central banks in a number of countries have begun to cut interest rates and introduce less restrictive monetary policy.
Also, the consumer class in emerging markets is a powerful force that continues to grow. We see this in Brazil where significant advancement in the consumer class has taken place during the last several years; in China, where the central government has made it a major policy focus to encourage domestic consumption; and in places like sub-Saharan Africa, where this is still in the early stages. Over time, we expect to see more exports from emerging-markets countries going to other emerging-markets countries, or over the longer term, more domestic production remaining within each country. These are long-term trends. In the short term, we expect growth to remain relatively strong versus that of the developed world albeit not as strong as it would be if the developed world, particularly Europe, were not experiencing the current issues.
2. What's the most surprising change you've seen in emerging markets during the last 15 years?
Perhaps it is the speed at which fundamental improvements have occurred in the developing world and how resilient emerging economies have been given all the turmoil of the last four years. However, I wouldn't say this has been unexpected. The reason I was so interested in emerging markets two decades ago was I saw the potential among these countries. There have been some definite false starts along the way, but the trend has been remarkably strong for the last decade. Think about it: 15 years ago, we were on the verge of the Asian crisis and, soon after, the Russian default. Now Russia is a solid investment-grade credit and Asia is the engine of global economic growth. It was just 10 years ago that investors were concerned about Brazilian debt, and by 2008 it was officially an investment-grade credit--a matter of just six years.
In our research effort, it used to be a matter of trying to determine if countries could secure enough U.S. dollars to pay on their external debt. Although there are still emerging-markets countries that fit that original emerging-markets blueprint, a number of countries are now external creditors. In large respect, it's become more about what happens globally than country-idiosyncratic factors.
3. Where are you currently finding investment opportunities?What areas are you hesitant about, and which do you think will experience the most growth in the near future?
I see good opportunities in Latin America among several countries. In Colombia, I've been impressed with the transition the country has made over time. I've had the highest exposure to Mexico than I've had in a long time because of Mexico's linkage to the U.S., and I'm generally positive on the prospects for the U.S. Venezuela also offers opportunities (see below). I remain positive on Asia in spite of the slowdown in China, where I think a hard landing will be avoided. Europe may offer opportunities as the year progresses, especially if we see better coordination among leadership there, but as of now, I remain underweight.
4. How do you manage currency risk?
The fund is primarily U.S. dollar-denominated, so currency risk would only really be a factor when we choose to invest in local currency debt. We don't hedge currency exposure, so when we do buy local-currency debt in lieu of U.S. dollar-denominated credit, our expectation for the currency is built in. If we reach the conclusion that the total return from local currency can exceed the U.S. dollar alternative, then we'll buy local debt.
5. What makes you bullish on Venezuela?
Simply, a lot of bad news is already in the price. Investors generally don't like Venezuela because of the leadership and direction the economy has taken. We think the willingness to pay on debt is there, in part because the local economy is reliant upon U.S. dollars to operate and fund projects and social spending. Export of oil (more than 90% of exports) provides the ability to pay. Although it's true oil production has declined during the last decade, recent investment by the Chinese in particular could help to stem this trend. So ultimately, it comes down to relative value. I'm not saying that Venezuela is a strong credit compared with other opportunities out there, but the current valuations more than account for the risk.