Hoguet Sees Better Days For Emerging Markets

January 16, 2009

SSgA senior strategist says despite facing a global slowdown, China and other key developing markets are likely to avoid a hard landing in '09.


George Hoguet is a senior global investment strategist specializing in emerging markets at State Street Global Advisors. Prior to joining the firm in 1998, he worked in London and Boston with Baring Asset Management. Hoguet has also worked at the Frank Russell Co., where he consulted with large institutional investors.

On Friday, he reviewed major investment trends for the coming year in emerging markets with IndexUniverse's Murray Coleman. Here's an excerpt of that conversation.


IU: What do the major emerging market indexes show about volatility levels now?

Hoguet: Emerging markets have been and will continue to be much more volatile than developed markets. However, if you look at emerging markets in a portfolio, a modest allocation amount can help reduce overall risks since they're not perfectly correlated with developed markets.

IU: Do you think emerging markets noncorrelation qualities will return?

Hoguet: In the intermediate term—over the next five years or so—correlations are likely to increase. In the very long term, China will become less correlated, as will much of the rest of emerging markets. In about eight or nine years, China should surpass Japan as the second-largest economy in the world.

IU: Then for long-term-oriented investors, you're still bullish on emerging markets?

Hoguet: Investors should have a strategic allocation to emerging markets, which represent about 9% of the world's float-adjusted equity capitalization. Currently, emerging markets face substantial headwinds. But the MSCI Emerging Markets Index has significantly outperformed the MSCI World Index over the past seven years. And for the 18 years ending Aug. 30, 2008, the MSCI Emerging Markets Index had outperformed the S&P 500 by more than 76 basis points per year.

IU: Over longer periods, hasn't the U.S. in particular outperformed?

Hoguet: That's true if you go back to the turn of the 20th century, because of the disruption of World War I and World War II. Also, the confiscation of assets by communist regimes meant that people lost everything and stock markets were closed in some countries. The point is, when you talk about the U.S. having above-average returns, that relates to the fact that in the 20th century, we've never had a period where assets were confiscated on a large scale and markets were closed indefinitely.

IU: Then how do you measure the U.S. stock market versus the world?

Hoguet: There are a lot of methodology issues such as survivorship bias. Many companies have gone bankrupt. But what you can say is that the U.S. has been characterized by a relatively high degree of political, economic and social stability.

IU: As an investable theme, what does this mean?

Hoguet: The reason the U.S. represents roughly 45% of the world's market capitalization and emerging markets about 9% is precisely because of the political and economic risks involved in emerging markets. So the question with investing in emerging markets is whether that risk is being properly priced. And the question is over the long term, how much should emerging markets outperform developed markets?

IU: What are some of the short-term negatives?

Hoguet: Those would include the reality of a global recession. They'd also include increased financing costs and credit contraction in global markets. Investors are still deleveraging across the world and are much more risk-averse these days. Commodity prices are declining and, in some cases, countries are facing prospects for continued currency weakness. Then there's the contagion factor, which means a sell-off in one market could lead to a sell-off in other markets.


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