May 5, 2010

T. Rowe Price Emerging Markets Stock Fund Manager Gonzalo Pángaro discusses the key factors driving the performance of this dynamic market segment. After their worst-ever annual performance in 2008, emerging markets followed up with their best year on record in 2009, outperforming developed markets significantly. Listen to audio clips from an interview conducted with Pángaro on April 9, 2010.

The financial crisis in 2008 resulted in a "stampede for the exit" in emerging markets, in Pángaro's words. But when investors realized that emerging market economies were on a more secure footing, markets rebounded. It helped that many emerging market countries have banking systems that are more simply designed and less burdened by leverage than those of developed markets.

The economies of China, India, and Brazil continued to grow in 2009, leading to strong market recoveries. Latin America was the standout region, led by Brazil, where stocks gained well over 100% for the calendar year. Even following such significant outperformance, Pángaro believes that valuations in emerging markets remain reasonable relative to developed markets.

Pángaro says that the fiscal crisis in Greece has resulted in buying opportunities for the fund. He has taken advantage of short-term market declines to add holdings that the investment team believes are financially strong and have attractive valuations.

Two main themes guiding the fund's investment strategy are the burgeoning middle class that is driving a rise in consumer demand and the modernization of infrastructure taking place in many emerging market countries.

The fund's portfolio features above-benchmark allocations to the consumer staples and consumer discretionary sectors, where Pángaro has found companies well positioned to take advantage of strong upward momentum in real wages and purchasing power. The fund's management team has also found attractive investment opportunities in industries that benefit from infrastructure spending, particularly in Asia, and in financial services and information technology.

While expressing optimism about the prospects for growth in emerging markets, Pángaro cautions that investors should maintain a long-term horizon and be comfortable with a high rate of volatility that is typical in emerging markets.

Given that emerging markets have outperformed the S&P 500 in eight of the last nine calendar years, investors would be wise to question whether such a track record is sustainable.

Pángaro cites two near-term issues that investors should keep in mind. The first is inflation, which could erode purchasing power. Another is the potential for geopolitical conflicts with Iran or between China and Taiwan. However, Pángaro says that he expects emerging markets to continue to outperform their developed counterparts over the next five to 10 years. He says favorable demographics and higher consumer spending, as well as the proliferation of companies that are capitalizing on those trends, represent opportunities that don't currently exist in developed markets.

Investments in emerging markets are subject to the risk of abrupt and severe price declines. Therefore, the fund is intended for aggressive long-term investors who can accept the price volatility inherent in common stock investing; the unique risks of international investing, including changes in currency values; and the probability of substantial price fluctuations.