Christine Benz: You have long had a sizable position in emerging-markets names, certainly relative to large-cap growth foreign-stock funds. Are you more inclined at this point to own developed-markets stocks straight up or to gain emerging-markets exposure via broadly diversified blue-chip multinationals that have made great inroads into those markets?
George Greig: Well, we've been a little bit underweight in emerging markets for most of this year really based on the monetary tightening and inflation pressure that we're seeing in a lot of emerging markets, sort of a classic overheating cycle that's affected India, Brazil, Turkey, and China, of course. And at the same time, we have also been influenced by relative valuation in that emerging markets are not as attractive relative to developed markets as they typically have been during the last five to 10 years.
Benz: Are you feeling that commodity prices are pretty well in check currently, and that should keep them from impeding growth in emerging markets?
Greig: I think, yeah, this is going to be an interesting question as we look forward. If we have a slowdown in developed markets and that results in a correction in commodity prices, ultimately that will have a stimulative effect on both developed and emerging markets, and we could expect to sort of get a growth dividend out of that. But there is a lag involved, and I think we might not kind of see that benefit until sometime next year.
Benz: How about the question of a property-markets bubble in China? Is that a concern of yours?
Greig: Yeah, that's a big concern. I think we are, just like everyone else, struggling to get data and information on this to understand how much excess supply there is in the market and how much price risk there is in terms of price trends relative to income trends and so on.
I think that real estate and construction in China is part of a theme of the economy being too reliant on capital investment, fixed-asset investment in general. And it's a big issue for us and for the markets to try to understand what the magnitude and timing of that cycle playing out will be. Does it have two years to go, three years to go, or two quarters to go? Remember, there were people starting to warn about excesses in the U.S. mortgage and housing markets as early as 2005, and the bubble didn't really burst for two or three years after that. In China, it's the same sort of situation except the information is much more opaque, so it's even harder to call the timing.
Benz: Now, has that thinking affected how you want to position the portfolio as it relates to your China exposure, either direct or indirect?
Greig: I'd say that it's made us a little more conservative about direct exposure in the financial- and housing-related sectors. So, in some cases, where we see this risk building, even though the fundamentals still look good now, we'll have smaller positions or no positions in some of these companies just because we're a little bit uncertain about the sustainability of that fundamental performance in the face of this kind of cycle.