Twenty years ago, I was told that emerging market shares were like mining stocks. This sounded an unglamorous if not outright demeaning description for one of the greatest growth stories the world was yet to see. But as the fortunes of emerging markets subsequently rose and fell in tandem with commodities, this adage rang more and more true. Two decades of data demonstrate convincingly that, despite their perceived long-term growth attractions, the performance of emerging assets depends primarily on the business cycle.
Every cycle reaches an extreme on the way up and on the way down. Persistent trends create their own mythology and investment fashions. The massive distortion of the financial markets by developed-market central bank intervention caused the long under-performance of value globally. To buy cheap assets is seen as horribly outmoded. Emerging markets are, therefore, “cheap for a reason”. Read more
Formerly a darling of emerging market investors, Turkey has come under a lot of scrutiny in recent months, as the political and economic environments have deteriorated. Turkey’s stock market has underperformed emerging markets by 12.4 per cent this year, and valuations for the market are cheap on both an absolute basis, with single-digit P/E ratios, and a relative basis, where the P/E is at a substantial 25 per cent discount to EM.
Despite this, there are several reasons why now is not a good time to buy Turkish equities. Read more
Academics and market practitioners often agree that, in the long run, a country’s equity market tends to reflect its broader macroeconomic conditions. When Zimbabwe formally dollarised its economy in 2009, the economy and the stock market soared. Between 2009 and 2012 real GDP growth averaged 10.5 per cent a year; in like fashion, the equity market went up by an annual average of 13 per cent.
The euphoria quickly wore off as Zimbabwe’s poor macroeconomic conditions became apparent. Read more
How much bang do fund managers give for their investors’ bucks? It’s a question that has provoked plenty of debate in the FT recently, prompted not least by the “scandalous index cloning epidemic” in which supposedly active managers charge high fees for simply following a benchmark.
EM investors are far from immune. So they may be interested to hear of a new service offered by Copley Fund Research, which tracks the performance of 100 of the biggest global emerging market equity funds, with a combined $265bn of assets under management. Read more
Tedpix index, 2 years. Source: Tehran Stock Exchange
Iranian investors’ concerns over the future of nuclear negotiations with the world powers, added to falling oil prices, have caused further falls in shares prices on the Tehran Stock Exchange.
The bourse’s main index, the Tedpix, closed at 66,902 on Wednesday – the last working day this week – about 11 per cent down from its 75,949 points on November 24, when investors expected the nuclear negotiators to yield results, particularly an easing of international sanctions over Tehran’s nuclear programme. Read more
Russian asset prices have taken a severe battering this year and are now ranked as among the cheapest in the world. The obvious question many are now asking is, “is this a good time to buy” or “is there more pain to come” which might lead to even lower prices and valuations in 2015?
Apart from the cheap valuations, the reason why investors are asking that question now is because, during Russia’s previous two recent crises, in 1998/’99 and 2008/’09, we had similar situations where the reasons to continue avoiding the country were overwhelming but it was, nevertheless, exactly the right time to buy. Read more
A fascinating note has arrived in our inbox from Steven Holden of Copley Fund Research, which tracks the investments of 100 big global EM equity funds with about $285bn of assets under management.
Readers may remember a recent piece based on his monthly report in October, showing that big fund managers were predominantly underweight in China compared with the MSCI Emerging Markets index, and overweight in India. An analysis of data from his November report shows that, on average, managers are in line with the MSCI regarding Russia – but that, individually, they diverge greatly from the index, in ways that suggest contrasting views on the crisis in Ukraine and how to play it as an investor. Read more
More bad news for Morocco this week, after it was banished from the Africa Cup for pushing to delay the football tournament out of Ebola fears. S&P Dow Jones has downgraded the equities market one of north Africa’s most stable and promising countries from its index of emerging markets to its frontier market index.
Alone among Arab countries, Morocco managed to weather the political tumult of the Arab Spring, even forging an unprecedented compromise with moderate Islamists that maintained stability without resorting to widespread state violence and helped the country maintain an average annual GDP growth rate of 3.5 per cent since 2011. Read more
After enduring 13 days of straight losses, Nigerian stocks have the questionable honour of being the world’s worst performing this year. Yet the man in charge of the stock market is not worried about a full-blown crisis. “I’m not expecting to see a sell-off, and indeed we haven’t seen a sell-off” said Oscar Onyema, chief executive of the Nigerian Stock Exchange, in an interview with beyondbrics. Rather, he says “the Nigerian stock market has adjusted downward, as you would expect in an OPEC country.” Read more
A double dose of gloom from Capital Economics on Tuesday. Its proprietary EM GDP tracker – compiled from monthly data on output and spending as an advance proxy for GDP – shows growth slowing across emerging markets to its slowest pace since early last year. A separate report shows that while EM assets have suffered across the board this month, the pain has been particularly severe in Latin America and especially in Brazil.
First, here are the charts from the GDP tracker. They show growth across EMs slowing to 4.3 per cent year on year in July, down from 4.5 per cent in June. Capital says preliminary data for August suggest growth will be even slower, at 4.1 per cent. Read more
South Korea’s benchmark Kospi index hit a three-year high this week on the prospect of rising dividends after the government announced tax measures aimed at unlocking billions of dollars in corporate cash reserves. It also unveiled a $40bn stimulus package to boost the country’s flagging economy as Choi Kyung-hwan, the new finance minister, promised to introduce expansionary fiscal policy. 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
The fondness felt by investors towards frontier markets has not dissipated since turmoil struck their emerging market cousins in October last year. In fact, feelings have climbed to a new pitch of devotion.
But the chart below raises an obvious question – has the ardour been overdone? Only rarely in the recent past have FM equity valuations traded at such a generous premium to EM counterparts. Read more
Now that’s what you call a change in sentiment. Outflows from emerging market equity funds so far this year have already eclipsed net sales from all of 2013.
Outflows from EM equity funds in the week to Feb 5 were a whopping $6.4bn, after a $6.3bn outflow in the week before, according to data from EPFR and distributed by Barclays. Read more
For all the talk of differentiation, emerging markets are having a bad Monday. Major currencies, such as the Turkish lira and Indian rupee have been hit; equity and bond markets are falling. As Benoit Anne of Société Générale put it, “global emerging markets are now trading in full-blown panic mode”.
But the recent message to investors from analysts was to look beyond emerging markets as a single asset class. “The real lesson from recent events is that the need for investors to discriminate between individual EMs has never been greater,” said Neil Shearing of Capital Economics. Clearly, the lessons are not being heeded. Read more
If investing is all about value creation, the latest batch of figures from Brazil’s central bank make for sobering reading. They show the rich returns you can make when investing in Brazil goes right – and the huge losses that result when it goes wrong. Over the past three years, foreign direct investors and buyers of Brazilian portfolio assets have suffered value destruction on a colossal scale.
An analysis of central bank figures by beyondbrics shows that ,taken together, flows of foreign direct investment to Brazil and foreign investment in Brazilian portfolio assets were worth more than $260bn between January 2011 and November 2013. Over the same period, in spite of those inflows, the value of such assets held by foreigners fell from $1,351bn to $1,327bn, a loss of $24bn, implying value destruction of more than $284bn in less than three years. Read more
Frontier markets climbed by almost a third over the past year, while emerging markets fell. James Mackintosh, investment editor, analyses why and whether this can continue.
China’s IPO season has officially reopened. Five companies said on Tuesday they had received approval from the China Securities Regulatory Commission to issue new shares, bringing China’s longest ever IPO drought to an end. Read more
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
If you had $100 at the start of 2013, and took a punt on a few emerging market exchanges, which ones would have made you a fast buck, and which would have reduced you to tears?
Beyondbrics takes a look at the best and worst performers in 2013. Read more