NEW YORK -- China's stumbling stock market has spooked many investors, but Justin Leverenz isn't one of them. He runs Oppenheimer's Developing Markets fund, the largest actively managed mutual fund specializing in emerging-market stocks, and he still sees big opportunities for stocks from China and developing economies in general.
Investors overall have grown more skeptical of these formerly fast-growing economies: Growth for emerging markets dropped by nearly half between 2007 and last year, and investors pulled out a net $1.3 billion from Chinese stock funds over the last 12 months, according to Morningstar.
Leverenz spoke recently about why he sees big gains for Chinese online-video companies in particular, as well as why he has avoided Argentine stocks and why Indian stocks may be in the midst of a strong bull market.
Q: You've called Chinese online-video stocks one of the best media opportunities of a lifetime. Why so optimistic?
A: America is disproportionate in everything -- half the world's health care spending, half the world's media spending. The only other country that has that capacity to develop these continental-size markets, whether it's health care or media or technology, is going to be China.
And that's what I meant by one of the greatest media opportunities of all time: China's a continental-sized economy. What you're going to see is advertising, which is relatively small in China as a percentage of GDP, is going to get a lot larger. That is because the real growth story in China is about the consumer, and that consumer is one of the most coveted consumers on the planet because every single multinational company wants to build a scalable business on the other big, continental-sized economy.
Q: What do you make of all the jitters surrounding Chinese stocks?
A: Chinese equities have done stunningly bad against the world's greatest growth markets from a macro perspective. There was a big bull market between 2004 and 2007, but we're basically back where we were 10 years ago. All great bull markets have to start in the environment of extreme stress and despair because then ownership is low. That's where we are in the Chinese equity market.
I think that China is the one economy that is addicted to reform, and that reform agenda is very powerful and will create significant, sustained growth. That reform agenda includes interest-rate liberalization, labor-market reform and lots of micro-level reform including consolidation and privatization.
Q: What do you think of the argument that it's better to invest in the Chinese economy by buying developed-market stocks that do lots of business there?
The Chinese model is very different. Think about Alibaba in e-commerce. Alibaba had to do things very differently than eBay did. Because you have a lack of trust in many of these geographies, where buyers didn't trust that sellers offered what they sold on the Internet, Alibaba had to create escrow accounts, which is Alipay.
There's a presumption that China is going to look a lot like America, and frankly it doesn't look like America. The world is heterogeneous: Tastes are different, distribution is different, business models can be radically, radically different.
Q: You've said Argentina and Ukraine are two places you wouldn't invest. Is the common thread the risk that politics can hurt investors?
A: Politics is dirty. The problem is institutions create politics. The institutions in Argentina have not changed for over 100 years. If you remember in the 19th century, Argentina was supposed to be a country like America. It had the same immigrant propensity, massive resources, very fruitful land. And it has always been a yo-yo, and that's because the underlying institutions are very easily manipulated in a fashion of populism, and those things aren't changing. Every couple of years there is a thesis that Argentina is on the cusp of change. And stocks run up hugely, but that's someone else's money. We don't do that.
Q: What about India, where stocks are surging on excitement about the new prime minister, Narendra Modi?
A: I do think in this five-year term with Modi, it will be a very strong market. It's not just his character but the unique mandate he's got, that he's going to be able to scare his opposition into doing things that they may not be inclined to do because they would be voted out if they didn't. From that perspective, all the bottlenecks in the economy -- about land clearances, environmental permits, financing for projects -- all those things that had completely broken the animal spirits of India will get repaired.
From the perspective of an investor, it looks really encouraging. However if India really wants to become powerful, a really significant player and not just a regional powerhouse, it is going to have to really change the labor laws so that people are willing to hire. If you can hire or fire people on an at-will basis like other geographies, then there's a huge amount of manufacturing, which is being moved to places like Bangladesh, the Philippines, Thailand, which could naturally gravitate to India. But if they don't, the long-term promise of India's demographic dividend will be hard to achieve.
Q: What kind of returns should investors expect from emerging-market stocks?
A: I can only speak to my fund. My fund in the long term generates somewhere between 12 and 15 percent compounded. I think that's the capacity of this fund. But in the environment where most people think interest rates are going to be stuck at relatively low levels, that's a pretty nice return. But that won't happen year in, year out.