We discuss volatility and opportunity in three major emerging markets. Despite the recent sell off in Russia, other oil exporting countries and emerging markets in general, the standard investment view has been that three of the BRICs – China, India and Brazil – are just too big and consequential to be ignored. This week’s guests concur. Kenneth Lowe, Portfolio Manager of the Matthews Asia Focus fund and the Matthews Asian Growth and Income fund, and David Nadel, Director of International Research for Royce & Associates and Portfolio Manager of several funds, including the Royce International Smaller-Companies fund, will discuss the opportunities they are seeing in Brazil, China and India.

WEALTHTRACK Episode #1126; Originally Broadcast on December 19, 2014
Listen to the audio only version here:
Nadel & Lowe

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We have compiled additional information and content related to this episode.
Read David Nadel’s white papers on India and Brazil here:

Download: WHAT COLUMBUS MISSED: Royce Rediscovers India [pdf]

Download: The New Brazil: Time to Join the Carnival? [pdf]

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KENNETH LOWE

Portfolio Manager, Matthews Asia Focus Fund

DAVID NADEL

Portfolio Manager, Royce International Smaller-Companies Fund

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[tab]What a week! In a much anticipated statement, the Federal Reserve unexpectedly maintained its intention to keep its key short-term interest rate, the Federal Funds rate near zero for a “considerable time.” Many Fed watchers had expected central bank officials to remove that phrase and signal that a rate increase was possible in the near future. The Fed also added that it can be “patient” about its timing to “normalize the stance of monetary policy.” As noted economist David Rosenberg of Gluskin Sheff put it: “New lyrics but the song remains the same…this was one crafty FOMC press statement. The Fed managed to have its cake and eat it too.”

The new expectation that the Fed’s “normalization” of monetary policy was still a long way off- Rosenberg says not for several quarters and maybe not at all next year- gave the stock markets a boost. According to Bloomberg, the S&P 500 had its best two-day gain in three years, up 4.5% on Wednesday and Thursday.

Meanwhile oil prices continue to plummet, as do gasoline prices. Oil has fallen about 50% to around $60 a barrel from its high above $110 this year. Gasoline prices have fallen more than a dollar a gallon from their summer highs, providing a huge savings to consumers and businesses. In some states regular unleaded is selling for less than $2.00 a gallon. As Fed chief Janet Yellen said, the decline in oil prices is “likely to be, on net, a positive…. It’s good for families, for households. It’s putting more money in their pockets.”

Unless you happen to be in Russia, that is! The Russian economy is fueled by oil, its biggest export. Russia’s central bank predicts GDP will contract almost 5% next year if oil stays at $60.00 a barrel. The ruble has fallen 40% this year, sparking fears of another financial crisis, like the one that occurred in 1998 when the country defaulted on its debt. In an emergency meeting this week, Russia’s central bank increased its key lending rate by 6.5 percentage points to 17%, the largest increase since the 1998 default. It did not stem the ruble’s decline.

Even before this week’s turmoil in Russia’s financial markets, there has been plenty of evidence showing the renewed volatility of emerging markets. .

In one day earlier this month, the benchmark Shanghai Composite Index experienced a nearly 5-1/2% decline, its biggest one day drop since 2009. It happened after a regulator unexpectedly tightened credit availability.

Nonetheless the Shanghai Composite has been the year’s best performing stock market, having been one of the worst for the prior five years. And China’s recent stock advance has been rivaled by its fellow Asian BRIC, India. At various points this year, India’s benchmark Sensex has been the world’s number one stock market, boosted by the May election of Prime Minister Narendra Modi, a pro-business reform candidate who overthrew India’s ruling party of 67 years.

What a contrast to the other two BRICs, Russia and Brazil.

Similar to Russia, Brazil’s economy has been weighed down by its leadership. Under workers party, anti-business President Dilma Rousseff, Brazil has experienced recession, inflation, rising public debt and scandals. The benchmark Bovespa index has been one of the worst performing markets in the last five years. It only recently showed some life with the appointment of a pro-business, U.S. educated finance minister.

Despite all of these problems, the standard investment view has been that Brazil, China and India are just too consequential to be ignored.

This week’s guests agree wholeheartedly. Both are international investors. Kenneth Lowe’s focus is on Asia. He is Portfolio Manager of Matthews Asia Focus fund, a concentrated fund launched in 2013 by Matthews International Capital Management, a pioneer in Asia-centric mutual funds. Lowe also co-manages the Matthews Asian Growth and Income fund, a much larger and older fund which is ranked by Morningstar and has earned a 4-star rating.

David Nadel is the Director of International Research for Royce & Associates, a pioneer in small company mutual funds. Nadel is Portfolio Manager of several funds including the Royce International Smaller-Companies fund.

We’ll find out why they believe investors should consider these emerging markets now.

We also have EXTRA interviews with both Nadel and Lowe available exclusively online. If you have comments or questions, please connect with us via Facebook or Twitter.

Have a Happy Hanukkah, a Merry Christmas and make the week ahead a profitable and a productive one.

Cheers,

Consuelo
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No Bookshelf titles this week.
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NADEL: EMERGING MARKET MANAGER

Ashmore Group PLC (ASHM)
London Stock Exchange

LOWE: ASIAN LIFE INSURANCE

AIA Group Ltd ADR (AAGIY)

Price: $21.36 on 12/16

52-week range: $17.92 – $23.42

AAGIY data by YCharts

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Shriram Transport Finance (Bombay Stock Exchange)

Kepler Weber (BM&F Bovespa)

Yum Brands Inc (YUM)

YUM data by YCharts

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KENNETH LOWE: ALIBABA EVOLVING

Portfolio Manager Kenneth Lowe from Asian mutual fund specialists, Matthews International Capital Management analyzes companies from several vantage points, including value and past performance. How does hot Chinese media firm Alibaba stack up? We asked him.

DAVID NADEL: RUSSIAN EXPOSURE

Russia is probably the last market in the world investors want to consider right now, but for contrarian investors looking for value it’s like a siren’s call. David Nadel, Director of International Research at small cap fund pioneer Royce & Associates and Portfolio Manager of the Royce International Smaller-Companies Fund is tempted.