Seafarer addresses how to invest in the emerging markets for the next decade.

Over the last three decades, many investors looked to the emerging markets under the assumption that underdeveloped economies would become richer, experience high rates of gross domestic product (GDP) growth, and provide equity performance. While GDP growth did occur, it did not always translate into equity market returns, particularly over the last decade. In the years ahead, many emerging markets are now expected to experience slower GDP growth than originally forecast. In this lower GDP growth scenario, how should developed market investors consider the emerging markets in the context of their overall portfolio?

1. Emerging markets offer diversification into non-U.S. dollar income streams.
   • While the S&P 500 has provided ample returns in the form of capital appreciation over the last decade, equity income (or dividends) has historically been another important, and overlooked, source of total return for equities.
   • Seeking income from multiple sources can help diversify a developed market investor’s total return.
   • Emerging market equities can provide an income source of return that can grow as company earnings grow over time.
   • The U.S. dollar is not guaranteed to be dominant in the future. Equity exposures too heavily weighted in one currency could increase investors’ risk of loss of purchasing power.
2. Consider the emerging markets in the context of companies not countries.
   • Historically, investment opportunities in the emerging markets have primarily been understood as a set of geographical exposures, such as China, India, or BRICs.
   • Lower GDP growth rates could mean that individual companies will have to create their own growth through operations of their enterprises. Leading companies will use operational know-how, access to capital, advanced technologies, and management skill to decouple their growth prospects from that of their slowing home markets.
   • Increasingly, high quality companies can grow beyond the constraints of their home country (e.g., rule of law, corporate governance, capital market formation) to be globally competitive enterprises.
3. Disciplined, focused strategies matter.
   • Unlike most developed markets, where securities are for the most part priced efficiently, the emerging markets are still rife with mispricings. Such mispricings can represent a long-term investment opportunity to developed market investors. However, to harvest the mispricings successfully, Seafarer suggests a focused, disciplined strategy (as opposed to an ill-defined strategy that leans heavily on growth at a reasonable price (GARP)).
   • High-performing companies in the developing world may still be somewhat rare. A concentrated portfolio can allow investors to clearly understand the risks and opportunities of each holding.
   • Seafarer believes the best way to exploit mispricings within the emerging markets is through a fundamentally-driven, bottom-up, concentrated approach. Any strategy in the developing world needs to be disciplined in order to create sustainable alpha.

The views and information discussed in this commentary are as of the date of publication, are subject to change, and may not reflect Seafarer’s current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. It should not be assumed that any investment will be profitable or will equal the performance of the portfolios or any securities or any sectors mentioned herein. The subject matter contained herein has been derived from several sources believed to be reliable and accurate at the time of compilation. Seafarer does not accept any liability for losses either direct or consequential caused by the use of this information.