At First Eagle we are often asked how we view the developing markets. Some prospective investors also wonder about our noticeable lack of exposure to the BRIC countries (Brazil, Russia, India and China). After all, the world’s wealth seems to be created in developing economies at an increasing rate, and many Asian nations in particular are growing at a pace that underscores the supposed resiliency of their economic models. As the developed world stumbles from crisis to crisis, many developing countries seem poised to continue taking a greater share of the world’s wealth.
While we do not dispute the notion that the developing markets are becoming the world’s growth engines, we are value-oriented, bottom up investors who do not automatically interpret this trend as a signal to invest. According to Matt McLennan, Portfolio Manager and Head of the Global Value Team, the top-line growth of an economy does not necessarily translate into strong returns from the ownership of equities. “The problem with buying the developing market-growth story is that a great many companies are trying to get into the market and participate. In economies with a lot of structural change, the companies that will generate earnings in five or ten years may not be the same companies that are thriving today. It’s very hard to know who the winners will be.”