Viva emerging markets!

One of the world’s largest asset management firms, Pramerica (Prudential America) sees a wonderful investment opportunity in Hungary. Arvind Rajan, the Managing Director and International Chief Investment Officer of the company says in his interview to that some emblematic emerging markets, for instance, Brazil, Indonesia, Poland, Romania, and Hungary, are stably catching up with the West and Japan – regarding, among other things, the interest rates.

According to him, the biggest potential lies in buying local currency debt of these countries. He believes that the global risk from China can be managed and that the world economy would not be hurt, if China’s economic slowdown endured.

Zentai Péter:  Do you think that capital markets are getting out of control? Trees don’t grow to the sky but the stock prices are still “soaring through the roof”.

Arvind Rajan: I am pretty optimistic that the environment can persist for quite a long time. There are structural reasons for that; primarily, because no significant growth is expected in the developed countries. Also, the demographic situation contributes to the continuous increase in asset prices: the population is aging, therefore, the number of consumers falls. Although the tighter regulation has deleveraged the government balance sheets and in some cases the household balance sheets, they are still in a heavily borrowed condition. In that state, it is very difficult to generate high growth, strengthen the labor market and create new jobs.
All these circumstances will keep the interest rates at low level. In the next two or three years, we will see tightening of conditions in the United States, but the politics of central banks will not change much – especially, not in Europe or in Japan. Thus, there is no danger of inflation for a while.
Everything seems to favor the capital markets and the investment environment.

More specifically, which markets are the most attractive? Where are the best buying opportunities?

Personally, I think that many equity markets and equities are quite low-priced. In such a low-interest-rate environment, P/E ratios (Shiller P/E: cyclically-adjusted price-to-earnings ratio) should be considerably higher. I believe that corporate credits are pretty good alternatives to government bonds, especially, in the emerging markets.

Can we talk about a homogeneous emerging, developing market? Isn’t it a bit bizarre to lump together the African countries and Hungary or Poland?

The term emerging markets is indeed inaccurate. We got used to separating the Western and Japanese markets from the Middle East, Eastern Europe, Africa, South America, and Asia like that. It was convenient to use this definition but it has become increasingly meaningless.
The Central and Eastern European region is in a process of long-term convergence with the eurozone. In that context, the gap between interest rates is continuously narrowing, which makes the debt denominated in local currency (zloty, leu, forint) a particularly attractive buying opportunity. The flexible exchange rates in the Central and Eastern European (non-eurozone) countries provide an additional policy tool to them. While Greece, Spain, and Portugal have to implement structural reforms to balance their budgets, Poland, Hungary, and Romania can freely implement their own currency policy. All in all, we believe in the convergence of Central and Eastern Europe, which is clearly reflected in interest rates.

Which Central and Eastern European countries’ assets does Prudential America buy?

Mostly, assets of Poland. Poland provides the best business opportunities. From a longer time perspective, the zloty is becoming increasingly appealing to investors. In the case of Hungary, the value is the high currency debt. We are also very bullish on Romania because of the rapid catching-up process there.


After the geopolitical crisis earlier this year, the pricing of Russian assets attract investors. In the middle-term, the political situation in Ukraine will relax: the West, Russia, Eastern Ukraine, and Kiev will work together to have a resolution because there are so interdependent. This is why we are interested in buying Russian assets: they are cheap!

I suppose it cannot be said of China now.

China has to transform its investment-based economy to a more domestically consumer-based economy. In order to accomplish that, very deep structural reforms need to occur – for instance, in the housing market. Right now, they are trying to tighten the credit industry and reorient their economy to other sectors. These reforms may by risky but China has lots of policy tools and intelligent people to carry out them.

Nonetheless, China’s economy is rapidly slowing down – at least, that’s what many experts say. Are you not afraid that this slowdown will hurl the Western economies into a new recession?

You have to be careful with sensationalism. The international press very often overdramatizes the situation around China. That might make you take the wrong way and make the big mistakes.
China’s GDP grew by 5.8% in the last quarter, however, this is fully natural and expected. It reflects demographic trends, vast overinvestment, and lower returns coming from the accumulation of capital. The longer-term growth has been reduced because the low-hanging fruits of productivity – that China has experienced over the last decade – are over. In order to unleash further productivity, they need massive structural transformation. As a result, they will see their economy slow down, but even this lower rate of growth is a positive contribution to the global GDP. In general, the global risk posed by China can be managed.

What are the most interesting emerging markets for investors?

Most people look at the equity markets when picking markets to invest. We need to have a larger scale of vision. Perhaps, the most effective opportunities are in Brazil. In the last couple of years, it has been severely punished by other markets: corporate shares and bonds have fallen significantly, assets prices are low, interest rates are unlikely to increase. In the long-term, real interest rates are higher in Brazil than anywhere in the world.
Similarly, we are quite optimistic about Asia, especially, Indonesia. It is a high-growth country with potentially productive gains in the future. Its political environment is becoming increasingly stable and predictable, as well.

On the whole, we believe in the potential of convergence of the emerging markets. These economies continue to grow faster than the developed countries of the West, while the international and local interest rate environment becomes more predictable than before.