EM equities

By David Lubin, Citi

You often hear economists and investors talk these days about the ‘broken growth model’ in emerging markets. It isn’t a terribly precise term but it’s easy to see what people mean. The problem in EM is that none of the three possible sources of GDP growth – exports, or public domestic spending, or private domestic spending – have much going for them.

Exports from EM are hobbled by a collapse in the growth of global trade and the related fall in world commodity prices. Public spending growth is weak because many governments are too nervous to loosen fiscal policy, fearing a loss of sovereign creditworthiness at a time when the outlook for capital inflows isn’t encouraging. And private domestic spending is hampered by the fact that credit markets in many countries are in ‘post-boom’ mode: neither domestic lenders nor borrowers have much in the way of risk appetite. Read more

How do you classify the countries known as emerging markets (EM)? That question has become more relevant since the FT declared the EM term unhelpful and obsolete as a definition.

So what should replace the EM term? Alexander Kozhemiakin recently argued that investors should look at the risks affecting an EM’s growth to get a sense of how safe their investments in particular markets might be.

Andrew Karolyi, a professor of Emerging Market Finance at Cornell’s Johnson School, however, also focuses on measuring risk, and has come up with a matrix to do so. In his book “Cracking the Emerging Markets Enigma”, Karolyi ranks 57 emerging markets and developed markets by averaging their score on six components. Read more

Emerging Asia is set to be the world’s fastest-growing region again in 2015, skirting the contagion from Russia’s crisis and riding the fall-out from weak commodity prices, according to Fitch, the credit rating agency. Nevertheless, structural frailties stalk seven out of 10 countries in the region, with surging debt levels a particular concern, the agency said.

The region, excluding China, is expected to expand by 5.9 per cent in 2015 and 6.1 per cent in 2016 – compared to an average for global emerging markets of 4.1 per cent and 4.5 per cent respectively, Fitch said in a report. These forecasts compare with the International Monetary Fund’s (IMF) estimates that developing economies would this year grow at 4.3 per cent, accelerating to 4.7 per cent in 2016. Read more

Jorge MariscalBy Jorge Mariscal of UBS Wealth Management

Over the past 20 years, 700m people have been lifted out of poverty in developing economies. This new middle class should grow another 60 per cent by 2020, increasing total consumption from $8tn to $13.5tn a year.

As the income gap with developed world peers narrows and aspirational consumer values converge, the emerging market middle class will be able and willing to pay for better education, health, housing, and infrastructure. These ‘public’ industries represent the most dynamic areas of the developing world – the new emerging markets to watch in 2015 and beyond.

Mass transit in Asia is an excellent example. The number of Asians living in megacities with more than 10m residents will double by 2025, the UN predicts. Meanwhile, vehicle ownership is doubling every five years amid rising incomes, while sharply rising carbon emissions are reducing air quality. Read more

“If you see ten troubles coming down the road, you can be sure that nine will run into the ditch before they reach you.”

For about two weeks in late October, it seemed as if these optimistic words from Calvin Coolidge, the former US president, might have encapsulated the mindset of emerging market (EM) investors.

But the late October rally in EM financial assets has now stalled. Investors are relinquishing hopes that market troubles may turn out to be mere phantoms and focusing again on the very real problems coming their way. Four of the most intractable are set out below. Read more

First the good news: the emerging market growth story is intact. EMs will continue to own a bigger and bigger share of the global economy, delivering attractive though volatile returns for investors. Now the bad news: EMs will never actually emerge. Even as they grow in importance, they will never achieve developed market status.

That is the view of Richard Titherington, head of emerging market equities at JP Morgan Asset Management. Despite what may sound like a gloomy prognosis, he describes himself as an optimist. Most of the problems facing emerging markets are cyclical rather than structural, he says. If the markets work, EMs will continue to pick up relative to DMs. Read more

Is this month’s bear run in EM equities merely a correction or the start of something big? As fast FT reports, the FTSE Emerging Market index is heading for its longest sustained losing streak since September 2001.

Anyone looking for signs of a structural shift will be interested in the chart below from Fitch Ratings, showing an improvement in both ratings and outlooks in the developed world that is the opposite of a strongly negative trend in EM this year. Read more

By George Iwanicki of JP Morgan Asset Management

In recent years, EMs have struggled relative to DMs because of the widening gap in economic performance. The chart below shows economists’ consensus forecasts for gross domestic product growth of EMs versus DMs over the next 12 months.

Economic growth in both EMs and DMs sharply improved after the financial crisis in 2008. In recent years, however, EM growth has decelerated while growth expectations for DMs have improved. This decoupling between EMs and DMs is the primary culprit behind the multi-year slowdown in EM profits, the decline in relative market performance and, within EM equities, the outperformance of growth stocks over value. Read more

By Sharon Fay of AllianceBernstein

Stock markets in emerging markets have gotten off to a rough start this year after a challenging 2013. Valuations have fallen and volatility remains high. So should investors add exposure to emerging markets—or is it better to steer clear?

In our view, it’s probably too early for a large tactical shift towards emerging markets. But we do think the time is right for investors who are underweight EMs—or who lack exposure altogether—to start rebalancing towards their strategic targets in developing-world stocks. While short-term caution is appropriate, we think EM stocks continue to provide a good long-term opportunity—especially for active managers. Read more

Emerging markets missed out on the equities rally in 2013, and EM stocks are beginning to look cheap. John Authers analyses whether this value can be realised, as there are risks from weak Chinese growth, falling commodity prices and the Fed’s exit from QE.

The 8th in our series of guest posts on the outlook for 2014 is by John-Paul Smith of Deutsche Bank

We continue to recommend that investors underweight emerging equities in a global portfolio, despite the MSCI EM having under-performed the S&P by almost 30 per cent in 2013 and by more than 50 per cent over the past three years. We are no longer especially optimistic about US equities going into 2014, as valuations now appear to price in the underlying strengths of the economy and corporate sector, but the relatively low level of valuations of emerging equities does not yet offset the more negative fundamental factors. Read more

Emerging market stocks are feeling the love again.

Investors who have led the summer stampede out of EM equities are slowly making their way back into once-battered markets like India, Indonesia and South Africa – lured by cheaper asset prices, the delay in Fed tapering and signs of improving EM growth fundamentals.

The MSCI Emerging Markets Index, having plunged by as much as 16.7 per cent between the first week of May and the end of June, has recovered nearly all its losses from this summer. Read more

Emerging market stock is cheap these days. According to cyclically adjusted price to earnings (Cape) valuations favoured by the recently laurelled Robert Shiller, EM equities look like a bargain in historic terms.

At the end of August, EM stock had a Cape ratio of under 17, compared to a long-term average of about 26.

This takes no account of the differences between emerging economies, of course, but it is at least interesting. Valuations are nearing those of dirt-cheap European stock, which has a Cape ratio of under 15, compared with a long-term average of about 21. Read more

EM investors appear to be polarising, between those who think the sell-off since May is a mere taster of the great unwinding still to come, and those who think it is a buying opportunity. Richard Titherington, chief investment officer for emerging market equities at JPMorgan Asset Management, is among the latter. He has made this call before and, so far, he has been right. Read more

By Tassos Stassopoulos of AllianceBernstein

Where can you find a car market which will double in size in the next five years? Brazil and Russia might be obvious places to look, but would you have expected Chile, Colombia, the Ukraine and Vietnam? Picking the next big themes in emerging consumer markets is even harder than in the well-researched developed world. To get a better handle, we think, requires a triangular approach. Read more

If you still think that markets move in cycles, this could be a good time to buy emerging market equities.

So says Richard Titherington, Chief Investment Officer for emerging market equities at JPMorgan Asset Management. You may lose money in the next three months, as the turmoil in the market works itself out. But on a one-to-three-year view, emerging market shares look good value. Read more

One day Brazilian stocks are going to get cheap enough to lure the bargain hunters back in en masse. Alas Tuesday was not to be the day.

The Bovespa index suffered its steepest one day drop in nearly two years – closing down 4.2 per cent at 45,228.95, its lowest level since April 2009. This takes the bourse’s losses this year to 25.8 per cent, making it the worst performer among the the major markets. Read more

From stocks to bonds to currencies, whichever way you cut it, it’s been a quarter to forget for emerging markets. Having soared to new heights at the start of the year as money gushed in, the asset class suffered a rude awakening in June after the US Federal Reserve announced that it could soon start scaling back its massive bond programme. Here’s a review of the quarter in a couple of charts. Read more

With the MSCI EM index dead flat at the time of writing on Monday, it’s fair to say that a bit of stability has returned to the market.

So, with the index down 13 per cent this year, is it a time to buy? Not necessarily, says Dan Morris, global market strategist at JPMorgan Asset Management: China and other big markets are down for a reason, while sorting the wheat from the chaff in the rest of the big barn of EM equities is as hard as ever. Read more

Emerging market assets suffered another bout of sell-off on Wednesday after the US Federal Reserve said it could start reducing the pace of its bond buying programme this year and end it altogether around the middle of next year.

The MSCI Emerging Markets Index fell 1.3 per cent to close at its lowest level since last September. Read more