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Emerging Markets Outlook: Opportunities Amid Challenges

Shaw Wagener
Portfolio Manager
Based in:
Los Angeles
Investment experience:

SHAW WAGENER: The biggest challenge for this year in emerging markets is actually somewhat embedded in the success of the countries through the financial crisis and the period directly following the financial crisis. The challenge is that the U.S. is recovering now, and as a result, global interest rates appear to be going up [and] global liquidity appears to be — shrinking is probably not the right word, but not growing as fast as it was. And so the combination of those factors — given the fact that a number of emerging markets have been the beneficiary of this flow of funds — makes it a challenge for a number of these countries to deal with how they’re going to see their way through this period.

As a result, we’re expecting interest rates to go up for a number of emerging markets countries. The currencies have weakened. One way to defend against that weakening, of course, is to raise your local interest rate and then draw in capital. The countries which are most vulnerable to that tend to be countries with a large current account deficit, and those countries have been suffering under weaker currencies and now are responding with higher interest rates.

So I think, during 2014, the big challenge is to deal with the fact that they’ve done well; the countries have done well over the last few years. The economies have gotten to be quite strong; they’re going to go through a period here of contraction to try to catch up with the change in global liquidity; and that’s going to result in higher interest rates, maybe a little bit higher inflation and probably weaker currencies.

An area that we’re finding very interesting in emerging markets — which actually, over the last three or four years, maybe even longer, hasn’t done that well — [is] companies involved more in the export sector.

Now of course, the technology companies — the large technology companies, which are now kind of household names, like Samsung — have done very well as stocks and as investments. But there are many more companies — particularly in the metals and mining, the whole minerals area — where the stock prices have been very weak on the back of lower commodity prices and, of course, the concern about global growth that’s occurred. But yet they’ve rebalanced their businesses. They’ve come through this period — many of them have come through — with strong balance sheets, and they have a lot of leverage, a lot of operating leverage. So any kind of pickup in the global economy, which we’re seeing in the developed markets this time around, should help those companies. And given what’s happened to currencies, and given the profitability impact of a lower domestic currency relative to something like the dollar, these companies should do quite well.

Past results are not predictive of results in future periods.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investing outside the U.S. involves additional risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries.

Capital Research and Management Company, the investment adviser to the American Funds, manages equity assets through three investment divisions. These divisions make investment and proxy voting decisions independently.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

The statements included here are the opinions and beliefs of the speaker(s) expressed at the time the commentary was recorded and are not intended to represent those persons' opinions and beliefs at any other time.