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By Jason Stipp | 11-12-2010 12:40 PM

Emerging Markets Graduate During the Crisis

With all their reforms taken over the last 10-15 years, emerging markets proved to be well-prepared for the recent financial crisis, says T. Rowe Price's Gonzalo Pangaro.

Jason Stipp: I am Jason Stipp for Morningstar. It's International Investing Week on Morningstar.com, and today we're focused on the emerging markets, an endearingly popular area with investors based on Morningstar's fund flow data.

I am joined today by Gonzalo Pangaro from T. Rowe Price Emerging Markets Stock Fund, an Analyst Pick in the emerging markets category, and he is here to tell us a little bit about the lay of the land and what he is seeing in emerging markets.

Gonzalo thanks so much for calling in today.

Gonzalo Pangaro: Thank you for taking the time.

Stipp: First question for you, Gonzalo, in Morningstar's fund flow data, we've seen that the emerging markets continue to be popular with investors. Investors are putting a lot of their money there. I was wondering if you could give a broad take on your sense of valuations in emerging markets. Certainly, we saw on Friday there was a bit of disruption in China. So, we're wondering, do you think that the emerging markets broadly could be due for a cool-off?

Pangaro: I think in the short term, I wouldn't be surprised to see a correction in emerging markets, but we continue to be constructive over the medium term. Emerging markets particularly during the global financial crisis, they really graduated, they proved that all the reforms which have been taken over the last 10, 15 years with fiscal prudence, controlling inflation, switching back into domestic currencies, and having very solid and plain-vanilla banking systems, they were really well prepared for the crisis.

In terms of valuations, valuations are still reasonable. We have come up a long way, but we're still trading now in line with developed markets when we look at the last 20 years, valuations are still in line with the median for the last 20 years.

What I have seen, which I think is very interesting, is a divergence in valuations, some less well run companies trading at still very low multiples. A few Russian names are examples of that, and other well-run companies, which have executed year-in, year-out, particularly in the consumer sector, trading at roughly 20 times, but we think many of these companies will grow into those valuations through strong earnings growth.

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