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Wait for Sell-Off Before Jumping Into Emerging Markets

Christine Benz

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. I'm here at the Morningstar Ibbotson Conference, and today I have the opportunity to sit down with John Hussman. He runs very wide ranging portfolios and we got his opinions on a broad swath of different asset classes.

John Hussman: I think that over the long-term there will be significant growth in emerging markets. I think that to some extent that is a long-term story that does not necessarily have short-term implications and investors have to be aware of that. And specifically if you look at China, for instance, they've got a whole lot more people than we do and eventually we'll get some convergence in levels of GDP and so forth, so we will get more expansion in China.

Right now what China really operates against is capacity constraints in terms of how fast it can grow. So, they are saving a lot, they are selling us a lot of goods and they are saving a lot, but they can't actually move all those savings into investments that have great prospective returns, so they are going to have to grow over time. As a result of that, their excess cash comes back essentially to the U.S., and so we've got this bifurcated world economy where the U.S. is consuming more than it should, and what we are doing is selling off claims on our real assets or claims on our future tax revenues, if we sell treasuries.

We're selling off claims on future stuff to China and China isn't really using all that right now, it can't use all that right now, so it's focused on producing for consumption purposes to us.

That whole profile will shift over time and there are going to opportunities there, but I think what you see in some of these emerging markets is the tendency for more speculative flows than real investment going on.

So, our tendency is to look at those emerging markets and view it as the long-term story and try and buy some of this when there are problems. And there will be successive problems in emerging markets because developing economies tend to regularly shoot themselves in the foot. So, if you are a longer term investor and you are interested in emerging markets get in when they shoot themselves in the foot, don't get in when those assets have already moved 100%, 200%.

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Benz: In terms of developed markets, are you finding some of the same themes where you think that the higher quality companies are generally more attractive than some of the lower quality, just happy to be alive companies?

Hussman: Yeah, Bill Hester co-manages the Strategic International Fund with me and he looks at a wide range of these markets and sectorizes them and so forth and we see exactly that. That there is also a split between low quality and high quality in some of the foreign countries. But what's striking about it is that the gap is much wider in the U.S. than it is in foreign countries. So, there is not as much dispersion between what you'd call safe stocks and what you'd call more speculative or tertiary issues in foreign countries as you have in the U.S.

So, we've been finding individual stocks all across the board. Right now, I think the best approach given that our view is that all markets are kind of elevated because essentially the interest rate structure. All of these short-term obligations out there have really drawn down short-term interest rates because somebody has got to hold them, right, if you create cash you wouldn't want to hold that if you had short-term assets that are similar character that are in anything above zero interest.

So, what's happened is that all markets globally are kind of elevated here, but for us the most straightforward way to focus on international markets is to look a little bit more for stability and also for dividends. And dividend yield is a real friend in some of the foreign markets because when there are air pockets, those dividend yields provide some support.

Benz: Well, John, thank you for sharing your insights. As always, we appreciate it.

Hussman: It's a pleasure.