Mr. van Agtmael: Emerging Markets Management, LLC (EMM) is one of the pioneer investors in emerging markets. I founded the firm together with several colleagues from the World Bank 22 years ago. Previously I had been involved in emerging markets for many years, first running an investment bank in Thailand and then later at the International Finance Corporation, the private sector arm of the World Bank whose objective was the promotion of private sector investment, including portfolio investment, in the developing world. Experiencing a boom and bust in the Thai market had taught me the merits of having a diversified fund for investing in emerging markets rather than putting all eggs in the basket of a single country fund. At first we called it the Third World Equity Fund - Third World, as developing countries were known in 1981. Prospective investors did not find that a very uplifting name so I then proposed that we call these markets "emerging markets" and that term somehow stuck. In 1987, we started EMM very small, with 25 million in assets, and the firm grew eventually to over 20 billion at its peak before emerging markets dropped by nearly two-thirds in 2007-2008 before and during the financial crisis. Currently we have just over 10 billion under management. We have a staff of about 70 people including portfolio managers and analysts, based mostly here in Washington, DC, but also out in Hong Kong, in Mumbai, in Istanbul, in Bahrain and in South Africa.
TWST: In turn then, all the emerging markets were impacted by the credit crunch
and the big downturn in the US economy. Would you take us through those
difficult months and tell us what you see going forward for the second half of
this year for emerging markets?
Mr. van Agtmael: Clearly, the linchpin of the global financial system is the
United States. When it develops a structural failure, as it did in 2008, the
whole world is affected financially. This collective heart attack (as Professor
Nouriel Roubini has called it) led to widespread fear that the world was on the
brink of a depression. Fortunately, the monetary and financial authorities
really took very firm action in terms of monetary easing, intervention in
troubled banks and fiscal stimulus. As a result, banks dared to lend again to
each other and a much deeper recession (or possibly even depression) was
avoided.
Now, the only stimulus package that has really had a direct impact on the global
economy was the one in China. The US stimulus package has had an impact only
indirectly, through a boost of confidence rather than through the money that was
actually spent. It basically showed people that they were no longer on the
brink. I think we can say that while this recession was about as bad as any
during our lifetime, it was also far from the Great Depression of the 1930s. In
retrospect, thanks to those official actions, it wasn't as bad as people
expected.
What was interesting was that the economies in emerging markets took it on the
chin first, even before the United States and Europe, at more or less the same
time as Japan. Why? Because many emerging economies are truly the new industrial
countries where much of what we consume is manufactured. They are often export-
oriented and so they saw their orders slackening early on. As a result, their
production went way down in late 2008 and, of course, everyone got very scared.
In global stock markets, this came to a climax in October 2008, though in
emerging markets it had started in October 2007 when investors began to realize
that the Chinese market and several others had become a bubble after a five-
year, 470% return in emerging markets. Markets tanked globally after the demise
of Lehman. In one year, between October 2007 and October 2008, emerging markets
went down by nearly two-thirds. However, it is important to point out that,
since that time, they were also the first to reverse back up again by over 70%,
outperforming the major markets by about 50%. It is a case of emerging markets
being first-in and also being first-out.
As usual, markets moved ahead of economies but it is now clear that the economic
turning point in emerging economies came in the second quarter when they started
to bounce back. When I use the word bounce, it is because their economies are
showing growth again on a quarter-on-quarter basis while we in the United States
and Europe are still mired in a recession that we will probably leave behind us
only later this year. So this time around, we are clearly behind, not
surprisingly because we were the ones to cause the current problems, unlike 10
years ago when the Asian crisis was the culprit.
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