Brent Jones is senior vice-president of international equities at GE Asset Management in Stamford, Connecticut, and co-head of the firm's emerging-market equities team, alongside Shanghai-based portfolio manager Zhou Ping. The firm manages $116 billion, of which $23 billion is in international (non-US) equities.
Emerging-market stock indices performed strongly in 2009. Is the asset class looking expensive headed into 2010?
Brent Jones: Another way to answer that is to ask where's the best value to be found in equities? The world has gone through two crises. First was a liquidity crisis, then an economic crisis. Developed markets on average suffered a crisis of liquidity, but emerging markets did not. During the 2009 recovery, emerging markets grew faster. We expect 2010 to also be good for emerging markets.
What specific factors or themes are driving that assessment?
Three things. First, stronger economic growth. The International Monetary Fund says two-thirds of global GDP growth is coming from emerging markets in 2010, particularly from Asia. The world is counting on emerging markets to deliver.
The second factor for these countries is that the financial crisis was an external shock only, so their economies weren't as damaged, and their stimulus programs had a quicker impact.
Third is flows. In the fourth quarter of 2008, emerging markets lost something like $50 billion in net outflows. Then in 2009 they enjoyed a record year of equity inflows -- but even so, this amount only just offset the previous year's outflows. The investment universe wants to own growth and now has a higher level of comfort with emerging markets. So we'll see more allocations to them.
Most US-based investors tend to be underweight emerging markets. Are you?
No. We share the view of our corporate parent that we want to have a diversified, long-term exposure to emerging markets. In 1996, GE Asset Management set up a dedicated emerging-market equity fund. We now also have dedicated portfolios for China H-shares, for Indian equities, and a QFII [qualified foreign institutional investor] quota for China A-shares. China and India are the key pillars to this story, and we wanted dedicated portfolios capable of accessing small-cap stocks there.
What about Bric-type products?
No, we haven't introduced Bric funds; that's more for the retail market. We prefer to gain exposure through dedicated China and India portfolios and a resources-sector fund. We set our asset allocation on a 10-15 year basis and we feel good about China and India.
We're positive on Brazil and Russia too, but we're less sanguine about what these economies may look like in 15 years. They're great resource plays, but maybe there are other, more efficient ways to capture the resource from China and India -- such as large mining stocks in developed countries.
That said, we are overweight Brazil, which has a strong domestic economy. But if the global economy should slow down, resource economies would suffer, and that would hurt the Brazilian domestic economy.
Are you concerned about asset-price bubbles in markets such as China?
There are signs of bubbles in emerging markets, but they have yet to start inflating. If the developed world is growing at a sluggish 1% and emerging markets are growing at 4-5%, then money will move to growth. This will drive up valuations, stock performance and currency values. Assets appreciate when currencies appreciate. We look to invest in emerging markets that have growth and wealth. China has clear plans for growth and strong foreign reserves.
How do you maintain exposures to these markets without getting caught up in potential bubbles?
Risk management. We're long-term bullish on trends such as urbanisation, which is going to boost demand for raw materials. But our investment process felt valuations were high and that these sectors needed trimming. We're not overweight property in China, for example -- but there are other ways to play the asset-appreciation story. Overall, however, emerging markets do have value, including China, and stock valuations aren't really expensive.
What are the risks you watch?
The key variable is the US dollar. If it remains weak, this is a positive for emerging-market stocks. If the US economy improves, the dollar will strengthen, which will lead to some flows out of emerging markets. We expect the US to recover, but it's going to be slow.
There are of course macro risks, such as Dubai World and the downgrading of Greece. 2010 will see elections in many countries, and politics can create volatile outcomes. If the developed world double-dips into recession, that would lead to problems for many emerging markets.