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Many of the emerging investment markets, particularly in Asia, have weathered the subprime lending crisis pretty well so far, but that may be because the final wave hasn’t hit yet, according to a panel at the Investment Management Conference November 14 at the University Club of Chicago. The conference was sponsored by the student-led Investment Management Group and Hedge Fund Group and moderated by Atif Mian, associate professor of finance.
“You would naturally think that a lot of things in the emerging markets which were also very, very highly levered from a financial standpoint should also be going down, but they’re not,” said Kouji Yamada, AB ’88, founder and chief investment officer of JCA Partners. “You had an earthquake that hit midtown Manhattan and it is traveling at a very, very slow speed.”
He said, “It really shows that it’s a great time to be an asset allocator, a great time to be a stock picker, because if you can posit what’s going to happen when the wave hits, you can position yourselves pretty well,” particularly in Asia, where “people think they’re immune to it, but they’re not.”
Many U.S. firms have announced billions in writedowns of securities backed by defaulted subprime mortgage loans, and fallout from the ensuing credit crunch is continuing.
“I don’t think we’ve really seen the worst of it yet,” said Eve Glatt, ’98, an international portfolio manager at Morgan Stanley Investment Management. She’s heard that in Florida, for example, apartments are for sale at prices that already have declined 20 percent, near where new condos are going to be built.
“There are going to be dire consequences when people have to pay to leave their homes,” she said.
These consequences to the U.S. economy will spill over to Asia, Glatt said. “There will be a lot of businesses that will be affected globally by a slowdown of the U.S. consumer,” she said.
Direct exposure from the subprime crisis has been felt in the big banks of Europe more than in Asia, said Alaina Anderson, ’06, a research analyst on the international growth team of William Blair & Company. But she said Mitsubishi’s exposure “was something of a surprise.”
“I think we’re feeling the impact in the financial sector globally,” Anderson said. “It will continue until all the bad news is out, which is probably not any time soon.”
Peter Boodell, ’05, with Eastern Advisors, said Taiwanese and other insurance companies will have writedowns on their subprime mortgage-backed securities at some point.
China, however, may be less susceptible to the fallout than other Asian countries, panelists said.
China’s “protectionist or insular nature” may have kept it out of some of these markets or securities, Anderson said.
Boodell pointed out that “you buy (subprime mortgage-backed securities) because you need to stretch for yield.” Chinese insurers benefited from guaranteed yield plans and didn’t necessarily have to stretch for yield, he said.
Still, while “everybody’s bearish” on U.S. mid-caps, Boodell said he thinks they are cheap. He said he is bearish on Indian and Chinese mid-caps.
But a problem in non-Asian emerging markets, Yamada said, is “you haven’t had a lot of issuance. You don’t have a lot of companies. You don’t have vibrant capital markets there.”
Yamada said the question is whether or not to buy the emerging market exposure today. “When you buy in emerging markets today, you’re buying the dinosaurs of the economy,” he said. “You’re buying the Dow, 1940, or something.”
Anderson offered a different viewpoint.
Brazil, for example, has “a very robust level of issuance and IPOs,” she said. “South Africa is another extremely rich, robust, deep, emerging market.” These markets have good retail, media, utility, and telecom sectors, she said. “You also don’t have to deal with the multiples of other emerging Asian countries.”
She finds Poland “interesting” because it’s on the cusp of entering the E.U. Turkey, too, she said.
“I think there’s a richness that’s been overlooked” in some of the non-Asia emerging markets, Anderson said. Glatt agreed. “There are a lot of very interesting companies, interesting growth opportunities, trading at reasonable multiples” outside of the so-called BRIC countries (Brazil, Russia, India, and China), Glatt said.
A bank in Italy generates 25 percent of its revenue from emerging Europe, she said. And she said Morgan Stanley owns a coke bottler in Mexico because of the young, consuming population that can be found there. “There’s also a lot of telecom opportunities in Latin America,” she said.
First-year student Lindsay Brehm said she was most interested in “how divergent” the panel’s views were on places to invest. “It shows the diversity and opportunities, post-graduate school” that are available.
- Mary Sue Penn