The previously gloomy outlook for emerging-markets equities is improving, according to Matthew Strauss, who specializes in these markets for CI Investments Inc.
"A lot of the potential negative news coming out of emerging markets is now brightening," says Strauss. These markets are growing "probably three times as fast as developed markets," he adds, noting that they already constitute roughly a third of the global economy.
Strauss is a vice-president, portfolio management and global strategist specializing in emerging markets and foreign exchange at Signature Global Asset Management, a portfolio-management team at Toronto-based CI Investments.
Strauss has co-managed the $214-million CI Signature Emerging Markets Corporate Class and the $135-million CI Signature Emerging Markets since June 2011, along with the Signature team's chief investment officer Eric Bushell.
Wearing "three hats," Strauss provides macro guidance for country and sector allocation for the emerging-markets mandates of the Signature group, and also for the broader asset-allocation team. Thirdly, he provides guidance on the team's currency exposure, which is actively managed.
In emerging markets, you're looking at 20 countries, 20 central banks and 20 different political situations, and some of them can be quite unstable, says Strauss. "One has to be much more selective." Currently, the countries that he is underweighting include Brazil and Russia.
"The fact that we do not have to slavishly follow the (MSCI Emerging Markets) Index," says Strauss, "helps us to almost automatically reduce the volatility."
Strauss currently favours Asian markets, and holds about half of his portfolio there. He thinks the market is too pessimistic about China. He's mindful that the world's most populous country faces challenges such as indebtedness in the local-government sector and pollution. However, on the positive side, "the government is very aware of these issues and moving slowly to address them."
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Strauss's sector positioning reflects in part two major investing themes: growing household affluence in developing countries, and the need for infrastructure investment. According to Strauss, these factors boost the need for sectors such as financial services and consumer staples.
"Staples remain a very strong story," says Strauss, "because of the growth from a low income to a middle income, for example. I think that's going to continue. We're still talking a 4% to a 5% growth on average for emerging markets."
Strauss's portfolios are broadly diversified among 100 to 120 holdings. He and Bushell draw on the research of eight sector specialists, who are also portfolio managers. The team favours companies with strong balance sheets and with a fair amount of liquidity.
Since the Signature portfolio managers prefer to meet with company management before investing, Strauss is a frequent traveller. It's not enough, he says, "to just read the reports from analysts and the political views." In late May, for example, he will spend a week in India to assess the impact of the sweeping election victory earlier this month of Narendra Modi's Bharatiya Janata Party (BJP).
A Latin American holding that illustrates Strauss's approach is Mexican-based Grupo Aeroportuario del Centro Norte Sab de CV (OMAB), which maintains and develops airports.
"If you look at the infrastructure companies (in Mexico) from the bottom up, which are very expensive already, there was value in the airports," Strauss says. If the country is going to expand, with growth expected on a more sustained basis, "the airports will continue to grow very aggressively."
Strauss, 43, draws on 18 years in the industry, which includes international experience. Born and raised in Namibia, he received a master's degree in economics from the University of Stellenbosch, South Africa, in 1996. His early experience includes a role as an economist, trader and then chief financial market strategist at formerly named Absa Bank in Africa from 1998 to 2004.
In 2004, Strauss moved to Canada and worked as a trader and analyst for the regional municipality of York, looking after its bond portfolio for a short period. He then moved to Royal Bank of Canada as a currency and fixed-income strategist from 2006 to 2011 before joining CI.
"In historical terms, emerging markets are not cheap," says Strauss, "but in comparison to developed-markets equities, they are very cheap. Going into 2015, we are more comfortable about emerging markets. The biggest risk is probably how the markets will react to an increase in U.S. interest rates."
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