Practical analysis for investment professionals
12 January 2018

All Roads Lead to China and Emerging Markets

Expect US equities markets to decline and emerging markets to continue to grow in the next seven to 10 years.

That was the takeaway from Morgan Creek Capital founder, CEO, and CIO Mark W. Yusko‘s presentation at the 2017 CFA Institute Equity Research and Valuation Conference in New York.

Yusko is passionate about emerging markets, where he invests significant portions of his portfolios. He is particularly bullish on China.

In his contrarian talk, “Global Search for Alpha: All Roads Lead to Emerging Markets,” Yusko summed up his investment philosophy: If you make an investment and feel good about it, then you likely made a mistake.

US Decline

Yusko believes that US equity markets are in a bubble that will burst in the coming months. “We are in a land of pure imagination now,” he said, referring to equity valuations. “We have been on an escalator up and will be taking an elevator down.”

There have been other bubbles over the last 17 years, Yusko observed, whether in tech or housing. But today’s bubble stands out. It is the “everything bubble,” in Yusko’s words. When CAPE ratios are adjusted for excess margin, equity valuations are about as high as they’ve ever been in the history of the US markets.“We are in the most expensive market ever,” he said.

And when the bubble pops, the ramifications will be severe. Thanks to the recent surge in indexing, a practice Yusko describes as “bizarre,” investors will have the wrong exposure at the wrong time. “Indexing is great,” he said, “until it’s not.”

With US equities so overvalued, Yusko said it’s time to look at emerging markets like China, which he predicts will dominate global growth over the next decade. Why? Because emerging markets have strengthening currencies, provide more growth at a cheaper price, and are bolstered by their high population growth rates and more effective economic policies.

When it comes to the BRIC countries, Yusko expects Brazil and Russia to continue to do well since oil prices have not drastically dropped. Indian equities offer good value overall given the country’s rapid growth, low inflation, and increasingly educated population. Indeed, Yusko expects India and China to both grow at a 7% rate.

Bullish on China

China should offer investors a big demographic dividend, especially in comparison to the United States. Composed of about 300 million people, by Yusko’s estimates, China’s middle class is equal in size to the entire US population. In the United States, the large baby boom generation is retiring and taking productivity down with it. But China’s middle class could grow to up to 700 million people over the next two decades and the country now has the largest consumer market in the world. Moreover, Yusko believes that, contrary to media reports, China is actually underreporting its growth.

China is set to emerge as the foremost global superpower in finance, Yusko said. The country’s leaders are intent on making the renminbi a stable reserve currency for central banks throughout the world. Moreover, Yusko believes the dollar is in decline and may one day be supplanted as the top global reserve currency.

Where else is China moving ahead in economic development and market growth? Over the past 15 years, Chinese equities outperformed their US counterparts, Yusko said, and China’s government is laying the foundation for further growth, creating special economic zones, increasing venture capital, and encouraging innovation. More patent applications are filed in China than anywhere else, and new Chinese companies and venture funds are coming on line all the time.

Yusko described China’s Belt and Road Initiative to construct a highway from China to the Netherlands as the greatest construction project the world has ever seen.

In the United States, on the other hand, wealth is not being created so much as redistributed on a grand scale, Yusko said. He cited statistics indicating that South Korea has 17 engineers for every one engineer in the United States, and that there are 40 lawyers in the United States for every one in South Korea. Thus, creating barriers to US immigration is, in Yusko’s words, “a dumb idea.”

So, how can investors access investment opportunities in China and other emerging markets?

Yusko favors something close to the endowment model of investing: focusing on private investing and Chinese growth equity. He believes the top three endowment funds are:

  1. The Dietrich Foundation, as a rule, holds 15% in cash and 85% in private funds, with 25%–30% of the latter invested in Chinese growth funds.
  2. Jeremy Grantham’s Funds tend to have 40% invested in venture funds, 40% in hedge funds, and 20% in emerging markets.
  3. The Yale Endowment is 53% privately invested.

Yusko challenged the New York audience to move beyond their US-market home-country bias and embrace an emerging market investment strategy. The alternative is to risk being on the losing side of the markets.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image courtesy of Paul McCaffrey

About the Author(s)
Cheryl L. Evans

Cheryl L. Evans, JD, LLM, is a director, professional learning, at CFA Institute. She has also served on the Future of Finance team and was a senior investigator in the Professional Conduct Program at CFA Institute. Prior to joining CFA Institute, she held various legal positions, including: senior counsel at the US Securities and Exchange Commission; trial attorney at the US Department of Justice; and Special Assistant US Attorney in the Eastern District of Virginia, handling criminal matters, among other positions. She holds bachelor of arts, juris doctor, and master of laws degrees.

5 thoughts on “All Roads Lead to China and Emerging Markets”

  1. Tony HAYES says:

    Yusko believes that US equity markets are in a bubble that will burst in the coming months. “We are in a land of pure imagination now,” he said, referring to equity valuations. “We have been on an escalator up and will be taking an elevator down.”
    Perhaps Yusko is looking at the wrong vectors. Perhaps he should go back to his CFA course and check out the dividend discount model. Please see the following and my preceding articles:

    The price of the DJII is at a 40% discount to value.

    Tony Hates CFA

  2. Ravi says:

    Is there a way we can get link to this lecture (video/audio)? They might not be available to non-CFA members but is it saved somewhere for members?


  3. Garry says:

    Bloomberg: October 3, 2017

    Mark Yusko, founder of $2.5 billion Morgan Creek Capital Management, says he would short Inc. if the stock reaches $1,000 a share.

    “At $1,000, now we’re at the end game,” the hedge fund manager said in a Bloomberg Television interview on Tuesday. “Now I can see a path that Amazon looks like Cisco and Microsoft did in 2000. And it can be dead money for a decade.

    ”Yusko isn’t calling fast-growing Amazon “a bad company,” he said. “It doesn’t mean they’re not going to dominate retail. It’s just the stock price is too high.”

    October 3, 2017 close: $957.10. January 19, 2018 close: $1,294.58

    “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” John Kenneth Galbraith-Economist (1908-2006)

  4. Cheryl Evans says:

    Thank you for the thoughtful comments Tony and Garry. He definitely shakes things up but is passionate it in his beliefs.

    Ravi, let me check on a link to his video and see if it is available. I will get back to you here.

    Best regards


  5. Michael Hadley says:

    I am puzzled to understand how international ecconomics as we understand them today will work if all countries are eventually “owned or governed” by China? I bear in mind the failure of the US Isolationist Policy of years ago. Surely international trade will not be competetive if all participant countries are under the same governing body?

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