Investors need to be in emerging markets.
That’s because the regions did well last year, says Jason Yablon, vice president and portfolio manager at Cohen and Steers in New York. He manages the Renaissance Global Real Estate Fund.
He says emerging markets were up “more than 40% in 2012 [due to] global inflation…rolling over, which enabled a lot of the emerging market countries to lower interest rates and stimulate domestic consumption.”
Yablon cautions, however, that selecting the right markets at the right time can be complicated. It’s especially tough to choose stocks currently “because growth…is picking up a little bit depending on the country. We’re…seeing some inflationary tendencies in certain countries.”
He says China, for instance, recently implemented government policies relating to home price appreciation.
Yablon adds the Chinese government is extremely sensitive to what’s happening to home prices, which is why it’s enacted policies to stop them from rising. It’s discouraging people from selling homes and buying second homes, having placed a “20% capital gains tax on secondary home sale gains, and measures like that impact the residential housing market. That then impacts equities.”
To manage exposure to emerging markets well, investors have to focus on the credibility of their management teams, and they have to look at business plans. He says, “That’s why it’s so important to have active management. The potential for value destruction by some of these management teams is very great, so that’s why you need to pay attention.”
He’s also underweighting Thailand, and says, “The domestic story in Thailand is actually extremely robust and healthy, but we’re underweighting the region…because there is some policy risk as a result of asset price inflation. That’s been pretty steady over the last couple of years.”
Further, Yablon finds Brazil is a tale of two cities. Though it’s been economically weak lately, Yablon finds its “economic growth is [improving]. But inflation has also been increasing at a rapid pace, and…the consumer is going to have to slow down” if that continues.
In terms of housing in Brazil, he says construction costs may start to surge while home prices will remain stagnant. He adds, “It’s a tough business in the home building market in [that region], so we’re very underweighted on the Brazilian home builders right now.”
On the bright side, there are still opportunities for investors. Yablon says, “I like the Philippines, especially from a real estate perspective. The economic story [there] continues to play out and it’s been very robust and healthy, and inflation has been very tame.”
That’s because the government has been supportive of real estate and its fundamentals are backed by “Interest rates [being] low, inflation is low and economic growth is [strong]. Consumers are spending money…and buying homes, with price growth remaining reasonable. It hasn’t been off the charts.”
Lastly, Yablon says Mexico is intriguing since its forecast is tied to U.S. growth. He adds, “The U.S. is doing better, so Mexico is also going to [improve] from an economic perspective. On top of that, [there will be] economic reforms in the country that will only help its long term growth.”
What’s more, “The cost to produce…in Mexico today has basically reached parity [with China] if you account for the transportation costs from a U.S. perspective.” Since Mexico is so close to the U.S, manufacturing has started to rebound and will continue to do so over the long term.