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Hogan: Asian Markets Are Well Positioned

Jeremy Glaser

Jeremy Glaser: Hi, I'm Jeremy Glaser with Morningstar. I'm here today with Dave Hogan, Client Portfolio Manager for Laudus Mondrian's Emerging Markets Fund. Hi, Dave, it is good to be here with you.

David Hogan: Good morning, Jeremy.

Glaser: You know I think that emerging markets over the last year have really -- they took quite a beating. We saw valuation, multiples just compress and there was a lot of fear that the supposed decoupling of the emerging markets from some of the western markets didn't happen. What kind of opportunities do you see today in emerging markets after that big revaluation?

Hogan: It certainly has been an interesting time, Jeremy, that's for sure. 2008, after a really strong, strong run for emerging markets for about five years, in 2008 the MSCI Emerging Market Index was off over 53%. So you're right, there was a significant revaluation in emerging markets last year.

What we found is that that has created some opportunity. And markets may be choppy for a bit going forward, but what we're finding certainly with the recent performance of the markets, investors are coming back to the asset class for a lot of reasons, including which you mentioned that there was just a major revaluation last year.

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Glaser: So what about the emerging markets make them more attractive or make them attractive to an investor as compared to say investing in the United States, investing in Europe?

Hogan: Yeah. Emerging markets are interesting in that they really have been maturing quite a bit over the last several years. Currently, emerging markets are about 30% of global GDP. That's up from approximately 20% 10 years ago. Half a dozen emerging countries are amongst the 20 largest economies in the world and China at this point is the third largest economy in the world.

So those markets are maturing and certainly very impactful. Maybe more specifically as we stand today, a lot of emerging economies, in particular Asian emerging economies, are particularly well positioned to come out of this equity cycle that we've been in. Their balance sheets are in order, if you will, the stimulus activity that they're getting involved in, they're doing in from a position of strength, they are spending capital that they don't have to borrow.

So in many cases, they're actually better positioned than developed western economies as we face a number of the same issues.

Glaser: So specifically, what countries do you think are kind of going to be at the top of that leader board and which ones do you think might lag a little bit?

Hogan: Right now, we are favoring - we like China. We had been underweight China much of 2008, but a combination of that market revaluating pretty materially and some of that forced ability we see where they are, it looks like GDP is setting in around 5% there and so we like China.

We are overweight Taiwan actually. And we actually have a modest overweight to Russia. That is a country that revalued very significantly in 2008 and so as a result we have some compelling valuations from a bottom-up standpoint.

Glaser: And then in which countries are you underweight?

Hogan: As far as countries that are significant to the index, Korea is about 13% of the MSCI Emerging Market Index and we are underweight there. We are materially underweight. We're less constructive on Korea. We think their banking sector has some issues. There are very high levels of consumer debt. There are some issues of transparency in that economy that make it a little more challenging for outside investors, so that is a market in particular that we are underweight right now.

Glaser: And then what do you think about kind of India and Brazil and, some of the other larger countries?

Hogan: We're also quite underweight India. I think we can summarize that by saying we just see more compelling opportunities elsewhere in the global. In Brazil, another major country index, we're modestly underweight there, not significantly underweight but modestly underweight.

There are some good companies there, some good valuations. There's also a lot of research driven issues in Brazil and we are not an inflationary camp and we are in general underweight material, so that kind of affects our outlook for Brazil in particular.

Glaser: Oh great. Well, Dave, thanks so much for speaking to me today.

Hogan: I appreciate it. Thank you.

Glaser: I'm Jeremy Glaser with Morningstar. Thanks for watching.