CFA Conference: Arjun Divecha

CFAManaging the Emerging Market Portfolio

Moderated by George R. Hoguet, CFA, State Street Global Advisors

Arjun Divecha is chairman of GMO’s board of directors, where he is responsible for overseeing the team managing the GMO Emerging Markets Strategy, GMO Emerging Countries Strategy, and GMO Emerging Illiquid Strategy. Previously, he was at BARRA, directing software development, marketing, and emerging markets research and development. Mr. Divecha holds a bachelor of technology in aeronautical engineering from the Indian Institute of Technology Bombay and an MBA in finance from Cornell University.

Key issues:

  • Asset allocation across emerging market countries and sectors: The search for profitability
  • Promising country/sector combinations: How to identify them
  • Strategies to exploit the emerging market demographic shift: The sweet spot in long-term global demand growth

My session notes follow. As always, these are contemporaneous notes. I make no guaranty as to their accuracy or completeness.

  • Why are rich counties rich and others poor? Rich countries tend to build institutions that can survive long periods of bad government. Therefore, in emerging markets, don’t marry – date promiscuously (move money around)
  • In emerging markets investing, getting the big picture right is the most important thing (right countries and sectors)
  • The paradox of growth – you invest in emerging markets for growth but you don’t make money in the fast-growing places
  • It’s not clear that historic GDP matters – it’s value that counts (buy cheap)
  • Emerging markets not heading for a crisis (current EME issues, which are real, tend to be cyclical rather than secular)
  • Emerging economies are in better shape than they were going into the Asia financial crisis (1990s)
  • Good odds today (see, e.g., PE ratios – now about 12)
  • He likes…value and changing demographic and domestic matters; down cycle could continue, but good odds; down cycle largely a consequence of tapering, but tapering because of expected growth – that’s a good thing; EME economic bottom 12-18 months out
  • Value works due to expectations; most money made from awful to bad (unexpected) – going from good to great (expected) isn’t that profitable
  • The key is owning what others are too afraid to own
  • Look for mix of troubled companies and troubled countries with potential
  • Likes Russian energy (truly awful), utilities in Brazil, Taiwanese IT and Chinese financials; doesn’t like IT in China and South Korea, financials in Taiwan and South Africa
  • Okay with Russian energy because he doesn’t think Putin is going to push much beyond where he is now – he simply doesn’t want Ukraine in NATO (historically – wants the buffer); Putin is acting defensively from his point of view, not offensively; Russian energy has consistently exceeded expectations; however, risks are extreme (political and company)
  • Country opportunities – plays out over 5-10 years (largely a function of demographics); EME not a monolithic asset class – he segments based upon who is being served (exporters; commodities exporters; in-country companies with demographic and financial opportunities
  • As countries get richer (move beyond US $3-10k per capita GDP), they shift from savings to consumption; small changes of income make big changes in consumption – nonlinearity; EME now in this sweet spot
  • When proportion of non-working to working people is high and dropping – good time to invest; thus India looks great now while Japan is troubled and China will taper off (US too); key – where’s the demand and who’s making money off it?


  • Distinguish between corporate earnings growth and GDP growth; predicting forward GDP growth tough sledding, not correlated to the previous periods (if you could, it would be a good predictor of asset growth)
  • China will have to deal with massive over-investment in certain areas funded by debt; risks are real, but China has multiple policy options to manage the problems (thus doesn’t expect a full-blown crisis but perhaps lots of distress)
  • Can cheap state-owned entities grow or are they cheap for a reason and will stay cheap? Remember, when the government decides to screw you, you are well and truly screwed; in general, SOEs and non-SOEs perform in a remarkably similar way; as economies improve, less raiding of SOE profits by governments
  • Geo-political risk – his favorite sort of risk because it is widely diversifiable
  • Tapering/US interest rate normalization/dollar strength – often bad for EME, but he thinks much of it priced in
  • Russia – The situation will continue to be volatile; but the main case he thinks is positive; corporate governance is bad and will continue to be so (he’s looking for 8x earnings, not 12x)
  • Mexico – He likes it in the intermediate to longer-term; competitive position improved vis a vis China; but it isn’t particularly cheap right now
  • What is most likely to cause EME volatility? The US Fed (a big rise in rates would be a big problem)

3 thoughts on “CFA Conference: Arjun Divecha

  1. Pingback: CFA Conference: Post Compendium | Above the Market

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