Claire Franklin: The era of free money chasing yield via risky assets is over. Last year, Argentina issued a 100-year bond that was oversubscribed, and that's an issuer that has blown up seven times in the last century. Yields in many assets had become detached from what is sustainable long term. In emerging markets like Turkey and Argentina, the effect of tightening liquidity unfolds very quickly. Many countries and companies have benefited from that wall of money, and it's quite difficult to pinpoint how quickly that will unravel.
However, a lot of other countries in emerging markets are in much better positions today than they were in previous crises. Our view is that investing in emerging markets equity is for the long term. We try to find companies that have strong business models, don't need much capital to grow and are not leveraged, and I think that this will be key over the next five or 10 years. When things start to get tough, you see which companies have that resilient business model, selling a good or a service that people should still be demanding in tougher environments, combined with a strong balance sheet. We'd expect those companies to be in a far better position.
Maria Negrete-Gruson: The current concerns about this broad macro-environment are certainly valid in terms of difficulty accessing capital. In the past, it was expected that a favorable global liquidity environment was necessary for emerging markets to do well. But that may not necessarily be the case in the future.
We see that this tight liquidity environment in emerging markets has forced better behavior by companies. These companies don't expect a favorable global backdrop, and they don't expect this wall of money that Claire referenced to bail them out. These companies are focused on what they can do to fix their profitability: how they can deleverage, how they can achieve sustainable profitability for the long term. And we see such behavior because of a negative macro-environment, which has affected emerging markets companies in a very favorable way.
Ricardo Adrogué: From an interest rate perspective, the environment has become more challenging for emerging markets due to increases in the U.S. rates by the Federal Reserve, as well as across the full yield curve. The U.S. curve has actually started to widen recently, including 10- and 30-year bonds whose yields have risen over the last few months.
In previous cycles, when the Fed was hiking rates, it was because U.S. economic growth was strong, which also translated into strong global growth, led by the U.S. This time around, thanks to U.S. trade policies that are more focused on fostering U.S. growth, it is not translating into or leading growth across the rest of the world. Not only emerging markets, but China, Japan and Europe are also not growing as fast as might otherwise be expected, so that tends to create a negative environment characterized by high interest rates without the positive backdrop of stronger global growth. But that is precisely the type of environment in which fundamental investors who understand the macro challenges, do their homework, and analyze countries and corporations deeply should be able to succeed.