A dank day in central London on the eve of the US presidential election proves a perfect time to talk all things emerging markets with Lazard’s James Donald.
Canadian by birth, Donald is visiting from the asset manager’s New York headquarters, to both escape the hyperbole surrounding the big day and capitalise on UK investors’ renewed interest in the developing world.
Fresh from celebrating 20 years at Lazard, Donald has plenty to report on how the emerging markets universe has evolved over the years while, as head of the company’s relative value team, he can talk stock names often absent from other funds operating in the same geographies.
“Emerging markets is not that old an asset class, and its make-up over 20 years has changed dramatically,” he says. “China was less than 1% of the MSCI World Index 20 years ago, and today it is a huge market, at 24%.
“We’ve gone through an industrial revolution in China, which changed the world in many ways but had a particularly powerful effect on emerging markets, where cyclical areas such as energy and materials grew dramatically and, for the past eight years, have come down significantly.”
With a focus on companies with relatively low valuations compared with profitability, Donald’s £1bn Emerging Markets Fund had a difficult 2015, when the most expensive stocks generally outperformed. An investment in the fund during the 2015 calendar year would have lost 16%, according to FE Analytics.
Says Donald: “Through 2013 and 2014, investors became less and less comfortable with some of the lower-quality companies, which had negative pricing power, and they gravitated towards stocks of companies that either had stable pricing power or positive pricing power. It wasn’t just an emerging markets issue, it was a global one.
“By mid-2014, a lot of managers said using valuation techniques was not working. They threw them away and paid up for quality. There was a massive move into the most expensively valued companies, and that lasted until the end of 2015.
“It was perhaps exaggerated by poor performance of commodities but it meant the most expensive stocks did far better. The most inexpensive stocks in our universe did by far the worst.”
