CNBC Transcript
November 2, 2007

06:22:44.84

Michelle Caruso-Cabrera: Emerging markets are still running strong. The group is up more than 45% so far this year. Founder and global CIO at Gerken Capital Associates, is betting on the consumer to drive the second wave of investing in the sector.  Lou, good to see you.  Is this the idea that we keep hearing: hundreds of millions of people in other parts of the world have final emerged from poverty and hundreds of millions more are expected to do so? They’re going to start buying a lot of stuff. Right?

Lou Gerken: Thanks, Michelle. That’s right.  Obviously the first wave of tremendous growth that’s led to the emerging market expansion has been the export-driven machinery in the case of China, minerals and commodities in the case of Latin America. What we see for the first time in noted history has been a tremendous amount of infrastructure investment that’s taking place on behalf of the various fiscal authorities, which for the first time will allow for the income inequalities that have plagued the emerging markets in the past to now start allowing for the bases to develop, an emerged, if you will, emerged countries with an emerging consumer sect.

Mark Haines:  How does that help us? I mean other than maybe, Deere, if there’s a rising of the middle class, a consumer society, they’re gonna just be buying the crap from China that we’ve been buying.

Lou Gerken: It helps us. A couple things. 2006 was the milestone year, it was the first year that China and India single handedly dismantled the U.S. as the key driver for GDP growth. It helps us, if you look at earnings growth, whether it’s Nokia, International Paper this morning, whether its Caterpillar, all domestic earnings are down to flat. You will the up earnings being reported are basically being derived from very, very strong international profits. It helps the U.S. and the very strong multi-national base that U.S. manufacturing has by way of a very strong emerging market.

Michelle Caruso-Cabrera: So what does that mean in terms of investing then? For so long when it came to emerging markets it was all about buying their bonds. But now their equities have been rock-solid now for the last couple of years. What are you doing? What kind of asset classes and where in the world?

Lou Gerken: Well, in China were still very much of an equity long-short. Greater China we still have very much of an equity long orientation. You don’t yet have many of the other asset classes that have developed, exception being something like derivatives. Five years ago equity derivatives in Taiwan didn’t exist, today they’re the third largest market in the world. Latin America is a different story.  By way of example, where have you a very, very developed asset classes across the board. Ten years ago, only 10 of the MSCI 120 index companies even had ADRs. And today they all do - so things are really rapidly advancing.

Mark Haines: Aren’t we better off as American investors in Latin America, say, than in China or in Russia? The reason I ask is, just off the top of my head, I’m reasonably confident there are no countries in Latin America that have a significant military agenda. The likelihood of international relations interfering with my investments, seems to me is much lower in Latin America than in Asia or Russia.

Lou Gerken: Historically that’s certainly been the case, although Latin America has its own different set of drivers - today what we find is that all the emerging markets have a completely different set of drivers, even Mexico it’s so depend upon the U.S., 85% of its exports basically are to the U.S. and the balance to Canada. But there are now a different set of drivers, whether it’s Brazil, whether it’s Mexico…Thank you