Echoes: How to play emerging markets in a fragmented world

David Herro, Co-CIO for International Equities at Harris l Oakmark, delves into decades of experience in emerging markets to assess whether we could be looking at another commodities supercycle, and why finding value is about sticking to process not consensus.

Looking over your career, what market event stands out as especially formative?

David Herro (DH): I know we’re sticking to the past 25 years, but I’ve been around a long time! And the thing is, all major crises have left a mark.

But if you’ll permit me, the Asian financial crisis in 1998-99 really stands out. Share prices across Asia collapsed, from Thailand through to Singapore, often indiscriminately – regardless of business quality. That panic also spread through emerging markets like Brazil and Russia. Yet, in many cases, the underlying value of businesses hadn’t fallen nearly as much.

For long-term investors, those dislocations represent tremendous opportunity if you’re willing to do your homework. Our team spent extensive time in Asia, seeking companies whose long-term viability was intact. With currency devaluations hitting companies with US dollar debt hardest, careful analysis was essential. Often, the more alarmist the headlines, the better the opportunity – if you could maintain conviction.

Many investors are reluctant to re-enter sectors or regions that burned them before-especially in emerging markets. How do you address that?

DH: Before every crisis there’s a period of indiscriminate enthusiasm – think Mexico in the 80s after the Peso collapsed in 1982, or the booming IPOs in China and wider BRIC hype in the 2010s. Investors price in growth but overlook risk. As professional investors, we need to adjust for instability or poor governance in some emerging markets, not just focus on growth.

At times, we were underweight growth stories and overweight out-of-favour places like Portugal or Greece. That paid off as the narrative shifted: the much-feared European sovereign debt crisis in 2011 never fully materialized. Crowds chase the same story and exit at once, creating the very price collapses that generate opportunity for patient investors.

Commodities have been cyclical darlings – and now some see another supercycle in metals and mining. How do you approach commodities as an investor?

DH: Every commodity is different. Iron ore, largely found in Brazil or Australia, has vast supply and is hard to corner. In contrast, copper faces new demand from technology like electric vehicles, while supply is more constrained. Oil looked supply-constrained until fracking changed the equation.

The key is to deeply understand supply and demand dynamics for each, not just follow momentum. Commodity businesses are capital intensive and risky; we own them only if the risk is priced in and prefer diversified operators like Glencore, which has both trading and mining arms. Most commodity bubbles are built on extrapolation, not realistic supply responses.

How do you instil discipline and patience, and how do you explain the approach – particularly when talking to younger colleagues or clients who haven’t experienced major downturns?

DH: It’s never easy, and it’s gets harder as investor patience declines. People fixate on one-year or five-year performance, not philosophy or long-term process. If you abandon your discipline to chase trends, you’ll almost always get whipsawed.

The lesson, learned painfully over time: you rarely need to rush in. See an opportunity, but add gradually. That lesson goes back to 1994’s tequila crisis – these bargains don’t disappear overnight. Focus on the intrinsic value, not just price movements.

How do you weigh opportunities in today’s emerging markets, given their diversity and volatile politics?

DH: Don’t lump EMs together. China’s story has sharply reversed with political crackdowns, while other EMs have become more attractive. Each market has unique political and business risks –missteps in countries like Brazil or Argentina can flip investability overnight.

And we always do bottom-up analysis. Because buying indices can mean owning companies you wouldn’t want, like state-owned banks that serve government policy over profits.

Would you say Harris | Oakmark’s philosophy was seriously tested during the dotcom bubble in 2000?

DH: For sure, the tech bubble was the biggest test. We stuck to fundamentals, refusing to buy story stocks with no earnings. It was a lonely stance, but we were unified. Many in the industry chased tech for fear of missing out – but our discipline protected our clients. Even today, with index concentration in mega-cap tech, parallels exist. We still find value by sticking to process rather than consensus.

Looking ahead, the future always seems uncertain to a degree. But there is a real sense that the world feels more unstable – whether it’s the concentration of AI-driven markets, the high levels of sovereign debt, or the unpredictability of President Trump. How should investors approach uncertainty?

DH: I always laugh when I'm watching CNBC or Bloomberg and they say it's so unpredictable today. It's unpredictable every day. We don't know what's going to happen in the future. First and foremost, people have to realise that unpredictability is just part of the environment. There are different things that cause this unpredictability. There are wars, there's energy policy, there's interest rate policy, there's natural disasters, there's pandemics, there's trade war. We are constantly in a period of flux and uncertainty.

How do we deal with this as investors? When we address this with our clients, we say think like an investor and not like a trader. What is the difference between the two? A trader is trying to guess price movements and then play what their anticipated belief is on that price movement. For a trader, volatility is the enemy. So, they're trying to play a short-term trend.

On the other hand, an investor steps back and identifies an undervalued asset and invests for the long term. When we invest in businesses, we're investing in assets that have long time horizons. We're not viewing our investments as trades. We're viewing them as long-term investments.

To me there are four keys to convince investors to stay invested. Number one, think for the long term – think as an investor and not as a trader. In this way instead of being jerked around by volatility and uncertainty, investors have the potential to profit from it. The short-term price movement gives an investor an opportunity to position him or herself for longer-term outperformance.

Number two, stay diversified. For the past ten years, ending December 2024 in equity markets, it didn't pay to be diversified. You just put your money in the US market, specifically the Magnificent 7 stocks, and it all worked. In the 1980s, similarly, you put your money in Japanese stocks and it all worked.

But it works until it doesn't. And historically, the longer it takes for the fundamentals to assert themselves, the bigger the adjustment back will be. What we've seen as an example in the past ten years in global equity markets is an unsustainable interest in US equities. US stocks account for over 70% of global equity indices.

In essence, being underweight US was a losing proposition. Global equity ex-US performed around 5% for those ten years, and the US did about 13%, so around 800 basis points per year over ten years. Now the S&P 500 is near flat this year and international indices are up almost 20%. So, historically speaking, it pays to be diversified. It might work over the short and even the medium-term, but eventually prices and value catch up.

Number three, macro environments are exogenous. There's nothing you could do about this. To go back to point one: think long term and take advantage of this. Investors have to realise to separate what they can do, what they can't impact, and not to fret over what is exogenous, what is given to them, but to try to take advantage of the situation.

And number four, you can’t ignore the price of assets – especially if you're an investor. If you're a trader, who cares about the price? All you care about is movement. In our view, the value of any asset is a present value of its future cash flow streams.

Even though something might look persistently underpriced, if the cash flow stream keeps going up, we think it often makes sense, to stay involved because, again, eventually fundamentals do assert themselves. Don’t play every price movement, look at the price of assets. Try to take advantage of not where the money was, but where the money will be going. A core investing belief of ours is that money will flow ultimately to where cash flow yield is.

The price of the asset is determined by cash flow streams, whether we're talking about a stock or a bond, or a property. And the price is ultimately determined by the rental stream, the net income stream, the interest stream, whatever it is. When we get hooked up to the trader mentality, we often just are blinded by movement and not by underlying intrinsic value.

What’s the one piece of advice you’d give for newcomers to investing?

DH: Don’t fixate on short-term prices; focus on underlying intrinsic value: is the business making money, does it have a path for growth? If your estimate is within 10-20% of reality, act on it – but don’t get swept up by daily price noise. It sounds simple, but resisting the crowd is always hard.

Analysts that are relatively new to the game are often convinced markets know something we don’t, attributing meaning to every move. Usually, it’s just trading flows or macro sentiment. The analyst’s role is to discern what’s fundamental and filter out the noise – especially now, with leverage and liquidity distorting short-term action.

Interviewed in November 2025