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By Andrew Willis |

Which emerging markets are on the rise?

Regina Chi, portfolio manager of AGF's Emerging Markets Fund, explains how and where she's finding quality and opportunity overseas

Andrew Willis: Emerging markets are continuing to grow. And while not always slow and steady, those ready for the ride have the potential to earn some great long-term gains. Regina Chi is Portfolio Manager of the AGF Emerging Markets Fund, and she is back with us today to discuss the latest emerging market happenings and opportunities for investors.

Regina, thank you for joining us again today.

Regina Chi: Thanks so much for having me.

Willis: Let's start by learning a little bit about your investment approach generally and how you apply this to finding opportunities in emerging markets?

Chi: Sure. For the AGF Emerging Markets strategy we have a disciplined investment approach and our belief starts with a notion that not all great companies are great stocks. Our definition of a great stock is an underpriced high-quality business with a fundamental catalyst. In our view, a cheap stock without a catalyst is just dead money.

Second, investing in quality is a cornerstone of what we do. We want to own companies with a great franchise, a defensible competitive advantage as well as strong management. So, we are looking at our companies through an EVA lens focusing on companies earning a rate of return above its cost of capital.

And then finally, we have a disciplined country allocation model using a combination of valuation, low-risk characteristics and positive growth sentiment factors. This is quite important for emerging markets, because as you know, local market returns are highly correlated to local currency returns. So, ultimately, we want to own a great stock in a rising market or relatively outperforming market than an underperforming market.

This approach has really worked well for us. Traditionally, we've shown very strong downside protection. We did that last year and equally, we demonstrated very strong upside market capture. And year-to-date, as you know, emerging market is up about 6.5% in Canadian dollars and we've done better than that. One of the key reasons behind this is the fact that we've increased our allocation to China in the fourth quarter. When everyone was super-bearish about markets, global markets, as well as the trade war as well as earnings prospects in China, we thought that these concerns were overly discounted in the market and then in the valuation.

Willis: Could you tell us a little bit about what kind of growth and trends we saw in emerging markets in 2018 and what markets we might want to watch in 2019 and why?

Chi: Growth in emerging markets has certainly been challenged last year. They were driven by a number of factors. First, trade negotiations, not only with Mexico, South Korea and now with China, we've also had very volatile emerging market currencies which forced emerging market local central banks to raise rates faster than expected. We think that the growth will accelerate from the second quarter of this year led by China where we are going to see an inflection of GDP growth from the 6% level going up to 6.5% by the end of this year.

Separate from China, we also are watching Brazil. Brazil will be going through pension reform which has been an ongoing topic for Brazil for a number of years. But if the new President, Bolsonaro, is able to get the pension reform through the Congress, then they are going to have a lot more of fiscal maneuvering to help the economy.

Willis: Thank you again for joining us, Regina.

Chi: Thanks so much for having me.

Willis: For Morningstar.ca, I'm Andrew Willis.

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