people in motion

people in motion

mercredi 10 avril 2013

Emerging Markets Roundup

Following the Smart Money

(See our previous  global research : Searching for New Emerging Markets )

Forget indexing. In the emerging markets, a more complicated global economy calls for a more sophisticated strategy. Here it is. The opportunities of investments remain high. It is however necessary to refine from now on our strategy of investment according to the particular case of every country. It is our quest  in our search for new merging countries  to inform you of the best opportunities throughout our tours in Emerging Markets.

Hence we shall determine and offer our best recommendations in terms of opportunities of investment. The  supposed "fall" or "increasing power" of BRICS means anything in particular. Since then it is necessary for us to analyse independently one from another.

For nearly a decade, the key to successful investing in emerging markets could be summed up in a single word: emerging. Economies like Brazil, Russia, India, and China were creating an emerging middle class, which in turn would create emerging demand for consumer goods, commodities and everything in between. It was a virtuous cycle -- or so it seemed. In the five-year period from 2003 through 2007, the MSCI Emerging Markets Index compounded at a 36% annual clip, and all it took to make money was to buy the index or a fund that hewed pretty closely to it.

Then came the global financial crisis, complete with a near-worldwide recession, housing and stock market crashes, and endless political strife -- all rooted in the developed markets but nonetheless affecting the emerging markets. The so-called BRIC countries, which make up 43% of the index, initially made a strong comeback in 2009, but have faltered since, dragging down the whole group. The broad indexes that track emerging markets are skewed toward the largest companies, which are often state-run and sometimes managed for political gain rather than economic gain. They're also typically export-oriented, dependent more on Americans buying gadgets or on commodity prices than local demand.
While the MSCI Emerging Markets Index is down 2% over the past year, other markets have fared far better. It is the first time in 15 years that developing shares have underperformed during a global market rally. They are, it seems, victims of their own decade-plus of outsize success, with their governments trying to contain inflation while keeping growth at a satisfactory pace. 

Though the BRICS (Brazil, Russia, India, China, Southern Africa) did not say their last word. They held last week their fifth summit in Durban. See Summary

They have faced serious growing pains. Brazil's economy grew a scant 0.9% last year. India is projected to grow at just 5% this year, the slowest rate in a decade, and while China averted a much-feared "hard landing," its new leaders are targeting economic growth of 7.5%, down from its 10% rate of recent years. Uncertainty about how the leadership of both nations will handle the current economic conditions is keeping pressure on their broad stock markets -- and hiding some gems.

see Buy India - Sell China

For first three months of the year, the developed countries markets  progessed of 6,6 %, against 3 % for the emerging countries.

S&P500 - green - and MSCI EM (orange)

Of course, competition to catch up with the qualification level of the developed countries remains long and perilous, or at the end only a few will know the destiny of Taiwan or of Chile. However our disappointment today is just like our past enthusiasm : excessive. 
There are exceptions to this trend, like Thailand and the Philippines. The latter, in fact, was highlighted by Turner Investments touting the era of the TIMPs, which groups Turkey, Indonesia, and Mexico alongside the Southeast Asian upstart. See  paper (PDF)

The MSCI Frontier Markets Index, which includes Pakistan, Kenya, and Vietnam, is up 9%. The JPMorgan Emerging Markets Bond Index Global Diversified index of dollar-denominated sovereign debt in these markets is up 17%.

Carve up the emerging markets even finer, focusing on where local consumer markets are thriving, and the results are even better: The MSCI Philippines index, for example, is up 39% in the past year; Nigeria is up 70%; and Mexico is up 17%.

Hence we shall determine and offer our best recommendations in terms of opportunities of investment. The  supposed "fall" or "increasing power" of BRICS means anything in particular. Since then it is necessary for us to analyse independently from one of another.

The opportunities of investments remain high. It is however necessary to refine from now on our strategy of investment according to the particular case of every country.
It is our quest  in our search for new merging countries  to inform you of the best opportunities throughout our tours in Emerging Market 

There are two ways to invest and profit from this developing trend :
  • Agricultural commodities
The total increase in commodities prices in 2000s did not distinct between producing countries, either they are producers of guavas, of soya or of copper. Today, evolution of prices is  more contrasted according to the type of commodity to the. Also, some countries succeeded in rationalising their production to remain profitable, others still wait from new price explosion to balance their budget. The first have a good future.
  • The new emerging countries (our triple D's)
The slower growth in China can also be viewed as the result of its rise in power. By externalizing the productions which made its glory over these 20 last years, China offers the opportunity to new countries to register high growth.

The set back move which we identified in the emerging countries tis last year is explained by an only big reason, the Chinese slowdown. Indeed, put out India, which economic model is based on services, the other three partners of China are first suppliers of raw materials. That it is Russia (oil, gas), Brazil (soya and iron) or South Africa (platinum). That is why the above mentioned common plans have an interest only as much as China, main provider of fund of these plans, will be capable of financing them.

Understanding the emerging countries and identifying the emergence of new countries, means first to understand where does Beijing go. 

Let’s review the Chinese  situation today and then we shall recommend then three new horizon of investment

Investments dedicated to the production plants went down from 30 % to 20 % over the 10 past years.

The profitability
According to the analysis, the profitability of the capital was reduced.

The abundance of the work force
The rural exodus which pushed millions of not qualified workers to migrate to the factory plants is decelerating, causing in some places a shortage of work force and an increase in wages.

The urbanization of the Chinese population continues, but at a lesser pace than these last years. It is this phenomenon which supported investments in facilities, in buildings or else in transports.

It is not possible to say that this slowdown is a surprise. The stages of development of any country are characterised by specific criteria. So, according to study, the level of the GDP per capita in China corresponds to the entrance in an intermediate stage, or the per capita income is "medium", around 6 000 $ a year. Consequently, the analysis assumes a Chinese growth from 10 % to 6,5 % before 2018.

The reasons of optimism remain present, however. Simply because the level of current development of China is comparable to that of Japan in 1970s, and of South Korea in 1990s. What means on one hand that there remain theoretically some years of strong growth for China, and on the other hand that in longer-term, China is going to continue its growing trend to get closer to the level of the developed countries.  Chinese GDP per capita is still only the fifth of that of the United States.

How to use this growth ? 
A new model of development is being put into place. The increasing power of consumption, awaited for a long time, should finally arrive. The part of consumption in the GDP should pass from 48 % currently to 56 % before 2022.

As you understand it, change will be slow  and requires time to be put into place. However, opportunities to invest on other economies in full boom, which they enter their 30 glorious barely, are existing 
The Consumer
Undoubtedly, the most tempting part of the emerging markets story is the consumer. Since 2008, consumer-oriented sectors, such as health care, staples (such as food and household items) and consumer discretionary (retailers and media companies) have outperformed. Markets such as Thailand, Colombia, and Turkey, which are skewed toward consumption, have racked up double-digit gains in the past three years. Funds that hew close to the broad index, however, likely missed the bulk of those gains, since the three sectors make up just 18% of the index and those three countries comprise only 6% of the index's assets.
There are several ways to gain access to the sought-after emerging-markets consumer, including U.S. or European companies like Nike (NKE), which gets a quarter of its sales from emerging markets, and LVMH Moet Hennessy Louis Vuitton (MC.France), which gets about a third of its sales from emerging markets.
Small and Frontier Markets
While much of the developed world has been starved for economic growth, a handful of smaller markets -- including countries as far-flung as the Philippines, Indonesia, Mexico, and Turkey -- have expanded enviably, largely on the heels of economic reform and newfound political stability. That's led to gains as high as 39% for the Philippines in the past year, and 17% for Mexico, and strong inflows into both markets. Both markets now seem a bit pricey at first glance: The Philippines trades at 17 times and Mexico 14 times next year's earnings, compared with the multiple of nine for emerging markets as a whole.

Southeast Asia, the other China 

It is almost like a historical trend. Japan developed from a model supported by a low cost work force and an exporting economy. Once reached some levels, South Korea and Taiwan took over the model. Then China. Currently, it is the turn of the South east Asia countries to copy the model.

So the Philippines today use a model mixing weak currency and low labour costs, to support the growth of the country at 6,4 % last year. Better, Standard and Poor' s raised the note of the country debt. And forecasts are exceptional also. According to the bank HSBC, the country should pass from the 44th place of economies of the world to the 16th in 2050.

See Myanmar's huge potential

Another country is making headlines : Malaysia. Malaysia is competing with China on its own ground. So, during the summit of Durban, an analysis of the Conference of the United Nations on trade and development (Unctad) showed from now on that Malaysia is the third investor in Africa, behind France and the United States, but in front of China.

This performance is explained as for Philippines by Malaysian capacity to keep a high growth rate in 2012, even though the exporting markets slowed. It is however necessary to underline that it is the oil which brought in Malaysia an important part of its growth (40 % budgets of the government). 

Of course, there are investments on the local companies of the country, which are better and better managed. For some investors who would have an expsoure in the Malaysian market, the oil group Petronas is being transformed into one oil major, and an can be interesting target is.

Increasingly, advisors are also adding a little exposure to frontier markets like Sri Lanka, Vietnam, and sub-Saharan Africa -The latest development for Africa see The Economist -

They're in an earlier phase of consumption and offer longer-term growth potential. Frontier markets -- typically defined by fast economic growth but nascent stock and bond markets -- also offer greater diversification. With a 0.61 correlation to the MSCI All Country World Index and a 0.60 correlation with emerging markets, frontier markets have offered some of the highest diversification in the world of stocks over the past decade.
Experienced managers, still say they can dig up some deals in what appear to be pricey markets. Investors sometimes balk at valuations too quickly, underestimating the longevity of some consumer trends,for instance Nestle Nigeria (NESTLE.Nigeria), which trades at 21 times 2014 earnings. That's not an unreasonable level, based on the country's per capita gross-domestic-product figure. 

Consumers now have more income, and are willing to pay a premium for branded food and beverages. A similar situation played out in India with Nestle India (Nest.India), she says. Nestle India now trades at 31 times forward earnings, but was far pricier in 2000.
Other small markets are attractive because the returns haven't been as outsize. Indonesia's 6% return in 2012, for instance, paled in comparison with its neighbors. Though blessed with resources and a large and young population, investors have been wary of Indonesia because of its high current-account deficit and weak currency. But some money managers say the softness in the Indonesian market allows them to scoop up companies with good long-term potential.
The New Way to Play Emerging Markets
Investing in the developing world has become a lot more complicated, and sophisticated investors are taking a much more nuanced approach. These funds capitalize on the big themes in emerging markets today.
Cheap Markets
Looking for the cheapest markets brings investors back to the BRICs, specifically, Brazil, Russia, and China. BRIC funds have seen outflows in 50 of the past 51 weeks, according to EPFR Global. While these countries struggle to navigate slower economic growth, they are bound to recover from their recent slumps. Earnings expectations are steady, whereas they are being cut in Europe and the U.S. Meanwhile, BRIC valuations have dropped to levels that are piquing managers' interest.
Few money managers, for instance, expect to see much change in the transparency and governance issues that have kept Russia on the cheaper end of the spectrum. And state-run companies in any country pose a risk. But with the market trading at just five times earnings and energy giant Gazprom (GAZP.Russia) trading at three times, it's cheap enough to warrant a look, even though it's 50% government-owned.
There are also catalysts to watch for. Brazilian stocks will get a reprieve if the government backs away from recent interventionist measures, such as trying to keep a lid on energy prices and pushing banks to lend. Just one example: Shares of the state-run Brazilian energy giant Petrobras (PBR) rallied 15% earlier this month after the company raised diesel prices -- a move it was able to make as government pressure to keep energy prices low eased. Some managers are looking at banks and real-estate investment trusts in Brazil as indirect consumer plays that are cheaper than retailers and other more obvious consumer stocks.
China, as mentioned before, is a more complicated story. Wages are rising, which means consumer stocks are appealing, as are some more subtle plays, like automation companies that can replace pricey workers. The most obvious consumer plays, even in these battered markets, are not bargains, but there are plenty of indirect ways to tap the consumer that are still reasonable, like Chinese PC maker Lenovo Group (992.Hong Kong) as a way to tap demand for computers and smartphones in emerging Asia, especially smaller markets other global players may not be able to easily tap. Lenovo derives two-thirds of its sales from emerging markets. Reynal is also looking at natural-gas companies as China struggles to combat its record levels of smog.
As the Chinese focus on cultivating domestic demand, smaller local players will be among the beneficiaries. The trouble for U.S. investors is that the universe of companies to invest in is far more limited for those investing in China through the more-accessible Hong Kong market. The Chinese A-share market -- mainland China's two stock markets, Shenzhen and Shanghai -- is denominated in the local currency and restricts foreign investment. But many of those stocks are more geared toward the "new China" story, with companies targeting the smaller cities that are in the earlier part of the consumption cycle. But the greater volatility and restrictions make it difficult for even professionals to invest. Just a handful of U.S. managers invest in A-Shares, including the tiny $43 million Aberdeen China Opportunities (GOPAX), which has the highest exposure at 5% of assets, according to Morningstar.
Dividend Payers
If dipping into these riskier areas makes you queasy, dividend stocks can offer some relief. Over the past decade, dividend-paying emerging-market funds have generated better returns and less volatility than the MSCI Emerging Markets Index, according to Morningstar. The average dividend yield of 2.7% in emerging markets and 3.9% in frontier markets is undoubtedly attractive as well.

But there's another reason to own dividend payers. As investors move into smaller markets where information is harder to find, dividends may be one of the best road maps available, since they telegraph a management's confidence in the future, ie : Forward Select EM Dividend Fund (FSLRX).
Here, too, there are some ETF options, but look carefully at their holdings before investing. The $114 million iShares Emerging Markets Dividend ETF (DVYE) yields 3.5%, though 29% of its portfolio is in developed markets. The WisdomTree Emerging Market Income Fund (DEM) yields 3.4%, but one thing to note: After its latest rebalancing, it's more heavily skewed toward Chinese financials -- an area some managers are wary about given the country's shadow banking and nonperforming loans.
Yield-seekers have recently discovered emerging-market bonds, and have poured in $144 billion since the beginning of 2010, according to EPFR Global. The appeal is clear: Dollar-denominated government bonds from Russia, Brazil, and Turkey yield more than a full percentage point than Treasuries and are arguably in stronger fiscal health.

But yield isn't the only reason to include bonds in your emerging-markets portfolio. Emerging-market debt offers greater geographic diversification, even when sticking to the index: The JPMorgan Emerging Markets Bond Index Global Diversified index has almost 70% in Latin America and Eastern Europe, for instance, while its equity counterpart, the MSCI Emerging Markets Index generally has about 25% there. What's more, bonds can provide access to economies in the earliest stage of development -- like Senegal or Angola -- through their government bonds, often before there is a sufficiently liquid and vibrant stock market.
Bonds denominated in dollars have garnered the most attention and vast sums of new money. That doesn't bode well for the short term, but in the long run there's still room for big gains. Emerging-market debt makes up just 5% of fixed-income investors' assets, but these economies are on track to account for half of global economic activity, says Jan Dehn, co-head of research at Ashmore Investment Management, which oversees $71 billion in emerging-market assets.
In the shorter term, managers see more upside in sovereign bonds denominated in the local currencies and dollar-denominated corporate bonds -- many of which have yields into the low teens.
Investing in local-currency debt also helps investors diversify away from the dollar. Many noted investors, including Pimco's Bill Gross, have warned that the United States' burgeoning debt levels can cause inflation and a weaker dollar.
Developing countries have more robust reserves and a fraction of the debt -- China, for instance, has $3.6 trillion in reserves -- setting the stage for stronger currencies in the long term. 
Corporate bonds are also attractive, with improvements in credit quality and a greater variety of companies looking for financing. Bond investors can tap industries like railways in Georgia and telecoms in Panama that don't have many liquid publicly traded stocks. Bonds can also be more resilient than stocks, especially in times of government intervention. When the Chinese government announced stricter lending standards earlier this month, Chinese property stocks tumbled 8% in the week following the announcement, but the bonds fell only 0.2%.

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