Chain Reactions

{Q} Are we now at the point where if China or India sneezes, the rest of the world, including the U.S., gets pneumonia?

{A} I think that will have some effect on the U.S. I think it will have a bigger effect on other areas of the world—Latin America, Africa, for example. It’ll have a big impact on economies that are more commodity based and sell a great deal of goods to these countries.

{Q} Do you watch emerging markets more closely than you used to, and how has that changed your strategy?

{A} In terms of our direct investments in emerging countries, we look at the valuations very closely. Our mandate allows us to have 0 percent of our assets in emerging markets; right now, we have about 13 percent in emerging markets. And while we believe that some markets, such as China and India, are overvalued, we think that the valuations for most other emerging markets are fairly attractive.

{Q} How have Exchange-Traded Funds (ETFs) affected trading in international markets—especially in light of mispricing in the recent downdraft, where the price of some ETFs was lower than the aggregate value of the stocks they represent?

{A} Certainly, it has made it a lot easier for money to flow into emerging markets. But ETFs are a relatively new phenomenon, so I don’t think we’ve seen the full impact they might have, which I think will be an increase in the volatility of some of these markets. Up to this point, it has been more of a move upward in emerging markets, but it will work both ways. The market capitalization of emerging markets is relatively small, so it doesn’t take that much money moving into those markets—and, conversely, out of them—to swing market prices and distort valuations. I don’t think we’ve seen that yet, but I think we will at some point.

{Q} Has Lowry Hill altered its recommendations to investors on how much international exposure their portfolios should have?

{A} Again, we have two offsetting trends. The one is the rising correlation of global markets over time, which takes away some of the attractiveness of investing internationally. On the other hand, there are so many opportunities outside of the United States—the world outside the U.S. is growing at a faster rate than the U.S. I think those two things offset each other, so we really haven’t changed our outlook on what percent of equities should be invested internationally. We’re still in the range of 15 to 25 percent.