Chief Investment Officer | Johnson Financial Group
As Chief Investment Officer, Brian Andrew leads Johnson Financial Group's investment strategy to provide consistent, actionable investment solutions for our clients.
Markets and Economy
5 minute read time
In a recent live webinar hosted by Brian Andrew, CFA, president and chief investment officer at Johnson Financial Group, Maria Negrete-Gruson, CFA, of Artisan Partners discussed the search for emerging-market companies with sustainable earnings growth—even in the Covid economy.
Negrete-Gruson is portfolio manager of the Artisan Partners Sustainable Emerging Markets Fund. She and her colleagues seek companies with a sustainable global competitive advantage and attractive valuations.
“The U.S. has been an exceptionally good market,” Negrete-Gruson said. “So why go to EM, with all these uncertainties and risks?”
She advised Johnson Financial Group clients not to make EM investments merely to diversify a portfolio. Rather, she said, invest in EM companies in pursuit of returns in excess of what investors can earn in U.S. stocks.
“You have to sift through the opportunities,” said Negrete-Gruson. “There are companies in emerging markets already in a stage to capture great things that have happened in the U.S. and are not yet happening in those countries. Why close off opportunities for this new set of consumers that you can access?”
Following is a recap of key themes from Andrew and Negrete-Gruson’s conversation, which was shaped in part by questions submitted by Johnson Financial Group clients.
Andrew noted that countries’ responses to the global pandemic have varied widely and asked Negrete-Gruson how those variations affect companies’ prospects.
“The pandemic has been a terrible thing in EM,” Negrete-Gruson said. “What makes Covid really fatal is poverty. It’s hard to talk about winners in this environment.”
Yet as Negrete-Gruson explained, specific companies have done exceptional things. “At the company level, even in countries with the poorest polices, companies have been exceptional at protecting themselves and their employees. They have been leaders in controlling the pandemic.”
The importance of company-specific context—rather than just country-level generalizations—was a theme throughout Negrete-Gruson’s comments.
Andrew asked her how she manages potential geopolitical risk and thinks about stability. Negrete-Gruson noted the huge differences among economies as diverse as China, Peru and Russia. Country-level risk assessments help her team evaluate currency risk. She places more emphasis, however, at the individual company level, and there she focuses on “positive change.”
Andrew agreed, saying, “In some respects you have to disconnect the geopolitical risks from how the company operates. The company may be leading in that particular country practices around governance—and that’s what you’re looking for.” He asked how Negrete-Gruson thinks about environmental, sustainability and governance (ESG) factors.
“To us, these aspects are not adornments you put in your investments. To us, it’s not, ‘Oh, good, they have that.’ No. Even in countries where geopolitics are less friendly, some companies excel and have separated themselves from the group.”
Andrew inquired about some examples of companies currently in the portfolio, and Negrete-Gruson chose two very different Indian companies. Both have sustainable earnings growth and solid progress on ESG factors, but one is what she called a “legacy asset transforming itself” and the other a “new, tech type company”:
Noting the significance of the potential consumer base of EM countries, Andrew asked whether the population size itself—and the rising consumption as personal income levels grow—is the crux of the EM opportunity.
Negrete-Gruson said there were, in the past, “first-stage winners” in that consumer evolution. These were the multi-national companies—she gave Nestle as an example—that brought consumer goods to populations that didn’t have them in quantity before.
Now, however, she sees a second stage of EM growth underway. “We already have the middle-class creation taking place in many parts of emerging markets,” she said, and explained that to sell goods and services beyond the basics, companies need to understand their audiences, including idiosyncrasies, with great detail. That dynamic favors companies based in EM countries rather than large multi-nationals.
Andrew noted that often companies benefit from secular trends across a region, such as Southeast Asia.
Agreeing, Negrete-Gruson said, “To simplify a country to a single currency is very simplistic, because a company has revenues in three other countries and so those currencies affect it. Given success in one country in a region, a natural step is to expand in another region.”
She explained that her team looks closely at where companies’ revenues come from. Each company—not just country—has a set of opportunities to consider.
Andrew wrapped up the EM discussion by emphasizing there are a “lot of layers” of analysis required to sift through those opportunities in pursuit of high return on equity and sustainable growth.
If you are interested in learning more about international and emerging market investments in your portfolio, contact your Johnson Financial Group advisor or find one today.
Negrete-Gruson was the keynote speaker at the Secure Futures Investment Conference in September. Secure Futures is a non-profit organization that provides financial literacy programs and resources that empower students to make sound financial decisions. Johnson Financial Group partners closely with Secure Futures in order to help build strong communities where teens and their families make informed financial decisions and take control of their financial future.
In addition to the Emerging Market themes shared in this recap, Andrew touched briefly on a topic to be addressed in detail in an October online event hosted by Johnson Financial Group.
In previewing that discussion to come, Andrew noted the complex interplay of monetary and fiscal policy, the federal government’s need to fund itself, the jobs picture, and the potential for post-election uncertainty about who won the presidential and Senate races. Watch for an email invitation to this webinar in the coming weeks.