Where to invest internationally

Friday September 29th 2006

Lindsay Vincent

Only the most inept manager could have failed to make decent profits from emerging markets during the sustained upswing in global equity prices. Today, however, many fear those days of easy money are slipping away.

Market men peer into the past, make informed guesses as to how rising interest rates and other woes influence developing countries in the near future, and conclude the next bear cycle could be staring us in the face. The fretful argue the length of the emerging bull market ? 1,207 days into 2006 ? was without precedent, as were the 260 per cent gains over that period. In other words, rather than emerging markets, now read submerging markets.

Christopher Palmer, a American with an exotic past, suspects the sharp early summer setbacks will prove little more than a turnstile on the never-ending road to reward. As the head of emerging markets at Gartmore he has optimism written into the job description. Still, markets are made by opposing views and Palmer is hardly alone in his corner.

Crucially, this optimism does not cover the whole waterfront. Palmer reckons the only places to be, in terms of serious money, are Brazil, South Korea and Russia. Beyond those destinations, he fears some emerging economies will be hit by falling prices for their manufactured goods, victims of overcapacity. And, he warns, beware of the China syndrome, indicating that too few people appreciate this is still an economy subject to central committee planning, rather than market forces.

Palmer once had the honour of being the most successful emerging markets manager on earth. That was in 2000, when he ran a small Jersey-domiciled fund for Gartmore. The award was bestowed by Micropal, backs were slapped and champagne flowed. Yet, despite this accolade and other achievements, Palmer was bypassed as Gartmore?s emerging markets top dog in favour of a colleague, Philip Ehrmann.

Palmer?s new status follows the latest change of ownership at Gartmore, the third in just five years. Ehrmann has since left the building and, like any new fund management incumbent, Palmer?s mission now is to improve performance. Hitherto, Ehrmann?s performance record at Gartmore Emerging Markets Opportunities Fund more or less matched the sector average, an outcome shaded by Palmer?s achievements at running Gartmore SICAV Latin American Fund. The latter is a $200 million fund while the global offering weighs in at nearly £270 million.

While Palmer seems, not unnaturally, to be a tad resentful about his lot under Gartmore?s previous management, his 1996 arrival was something of an event. Immigration rules then in place meant Gartmore had to contrive recruitment advertisements that mirrored Palmer?s credentials and for few, if any, other would-be aspirants.

His previous employer was Fouad Said, the fabulously wealthy Egyptian who made it big in Hollywood during the 1960s and 1970s as director, producer, actor and cinematographer. Known to be indomitable and ingenious, Said exchanged the casting couch for construction and made a fortune from building projects in Saudi Arabia.

Said was alerted to Palmer?s talents through a 1993 research report he had written on Mexican banks. ?It wasn?t flattering. He had just financed a large bank in Mexico and my research wasn?t the kind of research he was getting from other places.? Palmer took little persuasion to change his allegiance from Oppenheimer Capital to Said?s Unifund SA, and not just because of the handsome stipend.

Palmer joined Oppenheimer from Bear Sterns, where he assessed the credit-worthiness of hedge funds and others loaned money to speculate. For two years, he read at night for an MBA with New York University. ?It was like a world record,? he says of the time span.

After his ?discovery?, as he puts it, by Said, Palmer went to work on ?exiting a lot of the markets where he was invested? ? including Mexico, where Said had a large portfolio and where turbulence was followed by the 1996 devaluation. Ahead of that, Said sent Palmer to his Hong Kong office. Around £1 billion was managed from these two outposts of the Said empire, which now operates out of six offices on four continents. It was an anxious time in Hong Kong, since the 1997 handover loomed and Said wanted to liberate money.

?A fantastic man and, like all entrepreneurs, very fixed in his ideas,? Palmer says of Said. ?He taught me speed ? if you have an idea, act on it quickly, get the first-move advantage ? and to move in quickly when countries undergo great reforms, such as Brazil and Russia in the 1990s. Right now, he is probably in India.?

Palmer stayed in Hong Kong for just a year, much of which was spent selling down Said?s regional portfolio during the lunacy that preceded the 1997-98 Asia crisis.

While with the Egyptian, Palmer developed ?sophisticated models? for valuing companies, and these techniques went down well with Gartmore. ?I took a massive pay cut to come here, but I had found a place where I could do what I really wanted to do. Gartmore took a big risk on me, as I was a foreigner who didn?t fit the mould.? His research models ? ?introduced to bolster the research process? ? might have impressed the bosses, but not everybody. ?Brokers already do this research,? he was told by colleagues. Palmer responded: ?Brokers are paid to sell you these securities.? He adds: ?You have to remember that, then, people had had PCs on their desks for only a few years.?

A world where big is beautiful

Ahead of his promotion, Palmer?s double-act was hedge funds and Latin America. Here, he follows a well-trodden path of big companies, key industries and businesses that comply with international accounting standards ? a blue-chip portfolio with natural monopolies at the centre.

Due recognition should be given to the ?enormous social and political change? in Latin America these past 10 years. ?There are now relatively free and hotly contested elections. Social democracy has defused the political and economic crises of the past.? He is not worried by the region?s swing to the left, or last month?s disputed loss of the Mexican election by Andres Manuel Lopez Obrador, a fellow traveller of† Venezuela?s Hugo Chavez.

Palmer, keen to point out he helped Ehrmann build the team he now heads, plans major surgery on the emerging markets fund he inherited. South Korea and Brazil accounted for one-third of the pot and that is good, but Russia only 7%, presently behind South Africa and Taiwan, two countries he will now avoid.

Koreans take their chance

?South Korea is competing more and more with Japan, with productivity and quality to match. They have positioned themselves very strongly in China with relatively sophisticated products and the Chinese don?t want to pay Japanese prices. Some of their construction companies are also now very active in the Middle East, where they are making a big impact.?

Right now, Palmer is content to sit on the sidelines of China. ?Government can change the entire outlook and growth rate of an industry by diverting cash and resources ? as they are doing with the construction industry. It is still a centrally driven, command economy ? when they want it to be.?

Palmer?s reasons for selecting Russia as a key source of his investment funds is based on its oil wealth and new status as a creditor of western countries. His support for Brazil is equally familiar ? a strong, growing economy, immense mineral wealth and relative political and monetary stability.

His aversion to places such as Taiwan and much of south-east Asia is based on fears that manufacturing will be unable to compete with China on price and that many have ?industries with the potential for deflation?. He also fears South Africa, where workers were traditionally exploited, will lose exports because of rising wage costs.

This year?s jitters in emerging markets, he reckons, are a seasonal turn. ?We have had these pull-backs in each of the last four or five years, only to be confronted by strong earnings growth.? He says rising oil prices have ?fallen right into the pockets? of the governments of many emerging nations, such as Columbia, Russia, Mexico, Argentina, Brazil, Nigeria and Angola. ?All have energy wealth.?

?Fundamentals will prevail in the end. These markets do go up. Otherwise, why would I now be looking at these nice rising lines??

Money Observer

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