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By Jason Stipp | 12-06-2013 01:00 PM

Emerging Markets: Great Potential for the Patient

The growth story is intact for emerging markets, but it won't unfold overnight, says Seafarer Capital Partners CIO Andrew Foster.

Jason Stipp: I'm Jason Stipp for Morningstar. Even as the S&P 500 heads toward a 30% year-to-date gain, diversified emerging markets funds, as a group, are still narrowly in the red. But Andrew Foster, CIO of Seafarer Capital Partners says that investors need to keep perspective on emerging markets. He's called in today to explain. Thanks for joining us, Andrew.

Andrew Foster: It's my pleasure, Jason.  

Stipp: In your November letter to shareholders, you wrote, "As frustrating as this year has been, I do not think it matters much to the long-term investor with an objective perspective." We've heard the story about emerging-markets' potential for many years, especially coming out of the financial crisis. But this year, developed markets not just beating emerging markets by a little bit, but by quite a lot. So, what kind of perspective can you give investors to keep us on track?

Foster: It's tricky to answer that question succinctly. One thing that folks often throw out is valuations. Right now, the emerging markets, at least on the surface, appear a lot cheaper than the developed markets in the U.S. They're trading at about 10.3 times forward earnings.

But even I would concede that valuations can be deceptive. There are some very beaten-up sectors within the emerging markets that drag the average down, and a lot of the good stuff that investors might pay attention to, and be excited about, is still trading at fairly high valuations, well above that 10 times multiple. So, I wouldn't say valuations are the easy thing to latch on to.

I struggle with this issue myself--keeping good perspective--but what I often do is go back to history. History helps ground me. I first study what's going on in the emerging world, and right now, there is a lot of structural change taking place. A lot of reform efforts are going on. They're messy, and they don't mean an immediate kick-start to growth, either at the macroeconomic level or the corporate profit level, but there are some good things happening.

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