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Emerging Markets Roundup: Following the Smart Money

April, 10 2013

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. 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. See our blog for full report and reco


However our disappointment today is just like our past enthusiasm : excessive. 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.  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%.

There are three 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 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.


SEE RECO New Way to Play Emerging Markets

Considering the discussed factors, it might be a good idea to consider exposure to the following ETF’s –

Vanguard MSCI Emerging Markets ETF (VWO) for exposure to emerging market equities. The fund invests in stocks of companies located in emerging markets around the world, such as Brazil, Russia, China, Korea, and Taiwan. The fund has a low expense ratio of 0.2%.

iShares FTSE/Xinhua China 25 Index (FXI) for specific exposure to Chinese equities. China looks attractive at current levels and growth in China has bottomed out in all probability. I would still take a cautious stance and gradually invest in China.

iShares S&P India Nifty 50 Index Fund (INDY) for specific exposure to Indian equities. Growth in India also seems to have bottomed out and the recent interest rate cuts might trigger growth.

iShares MSCI Russia Capped Index Fund (ERUS) for specific exposure to Russian equities. Natural resources (energy) will be the primary growth driver for Russia in the long term. The market does look attractive with a long-term perspective and can give the double benefit of currency and stock market appreciation.

As China slows opportunities grow

See Buy India, Sell China

See latest Iskandar – A Promising Clean Eldorado

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.

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. 

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 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. We can capitalize on the big themes in emerging markets today. 
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

See Mexico’s Trust Buster

See  Nurturing Undiscovered Companies

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.