Posts Tagged Emerging Market Investing

I have been off the blog for almost two weeks due to a business trip in the USA. I met with a lot of people and it was just another affirmation that the global economy is truly shifting towards emerging markets and China for future growth. I also sensed that a growing number of Americans are becoming aware of that fact and are opening up to the concept of placing assets in foreign institutions and beginning to diversify away from the USD and US securities. It’s not rocket science to perceive that the situation in the USA is unsustainable. It happened to be another rocky week but if you are down on positions then limit orders should be occasionally ticking off. I also think it is appropriate to get more invested if you are heavily in cash. More positive hard economic data came out of China today and they are lowering the inflation rate. Also, Europe’s monetary crisis is coming to a head and should find resolution after all the brinksmanship.

Please note page 8 in HSBC s report
http://www.hsbc.com/1/PA_1_1_S5/content/assets/investor_relations/strategy_day/2011/110511_strategy_day_gulliver.pdf

The biggest bank in Europe which is now headquartered in Hong Kong, HSBC, is throwing all of their weight towards emerging markets.

Good assets lie in every market on earth. Many of the hallmark US companies that will excel have build powerful brands in fast growing emerging markets. The long term growth story still lies in Asia and Latin America. The fundamentals haven’t changed even though sentiment is swinging around.

Emerging nations: a beacon of opportunity
By Jerome Booth

Published: October 25 2010 19:19 | Last updated: October 25 2010 19:19

If you are looking for a market bubble do not look to emerging markets. The US and Europe remain a huge super-bubble. Emerging markets, by contrast, are safe. Putting one’s head in the sand and denying this reality has the attraction of plentiful company, but constitutes the opposite of prudence. Remember, lemmings also like to crowd together and the collective name for them is a “suicide”.

Unlike Europe and the US, emerging markets do not have a credit crunch, in essence a multi-year, very painful, deleveraging – that is, wealth destruction. But if you have not experienced 30 years of rising financial leverage, the past 10 to excess, you cannot get a credit crunch. Emerging markets are in a very different cycle to the developed world now, with inflationary not deflationary pressures.

The above comments will appear outrageous to some no doubt, just as my musing some years ago in a London club that Russian sovereign debt was a better credit than General Motors caused consternation to the listening ear of a nearby gentleman (subsequently a friend and convert). Prejudice is a powerful adversary for emerging markets, but also gives us a clue as to how allocation will shift only gradually to a more rational and prudent shape.

But is it not the case that emerging markets will be at least as risky if the developed world falls into the abyss? No.

Although of course they will be negatively impacted, they will still be the safest place on the planet to invest. They are not mere peripherals. Emerging markets are 50 per cent of global gross domestic product, using purchasing power parity, and have the bulk of industrial production, energy consumption, land, labour and growth. Their problem of too much dependence on the crash zone of Europe and the US is something mitigated by their strong domestic demand growth and which they are addressing through more south-south trade and investment.

But is it not the case that emerging markets are prone to bubbles? Not compared with the developed world super-bubble, or which cannot be dealt with through appropriate domestic policies.

Given the main motive for investing in emerging markets should now be because they are safer than the submerging (developed) markets, one should first look at fixed-income in emerging markets. So, more specifically: is there a bubble in emerging debt? There is not. Indeed there is the very opposite of a bubble dynamic – a strong, barely started, structural shift. Emerging market debt is a $9,200bn market, which may seem large, but is small compared with the underlying GDP of the countries concerned. This is the part of the planet which is capital scarce. Supply of debt is therefore totally elastic in all but the very short term. If there is $1,000bn of new demand in the next six months there will be $1,000bn in new supply, largely to build domestic sovereign yield curves and in corporate debt issuance.

The size of the emerging debt market is thus driven by demand, which is growing in an iterative way because of behavioural constraints. I am a big believer in GDP weighting – cap-weighted indices of publicly listed securities (typically misnamed “investible”) are a very poor representation of global investment opportunities. A better measure of global economic activity – and hence the full universe of investment opportunities – is past income – GDP, and that implies 50 per cent allocations to emerging markets.

Also the largest problem in the institutional investment industry arguably is misaligned incentives, which causes massive herding. It is the combination of these two deficiencies, combined with prejudice about emerging markets and inexcusably deficient concepts of risk and uncertainty that lead to gradual allocation.

A pension fund manager told me recently: yes, he agreed that GDP weighting was sensible and he was massively underweight, and yes, the industry suffered from herding where everyone was watching their peers, but he still had to be in the herd, though he could be at the edge of the herd. The result is that institutional investors invest a fraction of what they think is appropriate in emerging debt until their peers catch up and the result is gradual allocation over a period of many years. This is currently happening with many different types of investor peer groups all over the globe. Hence we have a gradual structural shift, not a temporary reversible move.

Today we face the risk of imminent currency dislocation threatening the dollar, and a growing risk of depression economics in the US.

The developed world is shouting hard for more investment capital – the question is: are investors going to give it to them or rethink risk, rethink tired asset allocation conventionalities and think for themselves?

Jerome Booth is Head of Research at Ashmore Investment Management

1. Valuations are still low/undemanding
2. Emerging market nations have strong GDP growth
3. And high foreign exchange reserves
4. And relatively lower debt levels compared to developed markets
5. Low bank interests in developed markets
6. Increasing investor confidence in emerging markets
7. Institutional investors on average allocated 3 to 8% of portfolios to Emerging markets in 2009
8. Meanwhile, Emerging markets now represent 30% of global market capitalization and this difference signals potential demand.
9. Emerging market equity has become good value at reasonable prices with relatively lower risk, compared to developed markets.
10. Emerging markets have the “market momentum”

Bloomberg reports that Templeton Asset Management Ltd.’s Mark Mobius said he’s been buying stocks in Brazil, Russia, India and China in the past month and called the slump in emerging-economy shares a “correction” in a bull market. “Despite the fact that a lot of people think that we are entering into a bear market, we don’t believe so,” Mobius, who oversees about $34 billion in emerging markets as Templeton Asset Management’s Singapore-based executive chairman, said in an interview yesterday in Cairo. “This is a correction in an ongoing bull market.” “When the time comes, emerging markets will recover faster and in a big way,” Mobius said. “We’ve been buying because we have had net flows into our funds. And most of the buying has been in the BRIC countries.”

www.crinvestmentadvisors.com

CR Capital are primarily emerging market equity experts. Nevertheless, the case is compelling that risk/return rewards for long term investors are greater if you cost average into equity exposure in emerging markets. Greater returns for little or lesser risk. Also, interest rates continue to be low and therefore returns on bonds are low with still significant “interest rate risk” on longer yields. You may want to think of your bond and cash portfolio now as simply your cash portfolio. Equities and cash should comprise most of your porfolio. Cash is value that is waiting to cost averaged into major stakeholder companies in faster growing economies as a strategy for true capital appreciation.

www.crinvestmentadvisors.com

Asset Protection

This is the real story.  Blackrock, the world largest money manager is investing in the same things as CR Capital and for the same reasons.  A higher savings rate and the absence of the “debt noose” that is constricting much of the developed world make emerging markets a more favorable investment story. BlackRock — the world’s largest money manager — has a “broad preference” for emerging markets over developed markets.  Doll said some of the developing world, such as Brazil, has the depth of financial markets and government institutions that border on developed economies.  “Absence of the debt noose around the neck that much of the developed world has, the emerging markets also have a much higher savings rate — therefore more flexibility in terms of planning their future,” Doll told the Reuters Investment Outlook 2010 Summit in New York.  A growing middle class and growth in consumption also make emerging markets attractive, along with valuation levels that are comparable with the developing world, he said.  As for the developing world, which accounts for more than 80 percent of the world’s equity capitalization, Doll liked the United States, followed by Japan and then Europe.
http://www.reuters.com/article/idUSTRE5B751I20091208
www.crinvestmentadvisors.com
Private Banking

In light of the economic crisis and unprecedented market volatility this year, I was pondering the consequences such as how people in the United States are not returning to consumerism. It brought to mind an interesting article that mused,

Past as Prologue: Above all, people’s psyches are being wracked by what behavioral economists call present-event bias. This is the belief that what is happening now will always be. The same thing happens in bull markets — values always seem to be rising until they don’t — but it is clearly more painful when wealth is being destroyed. Markets, of course, will go up again.

“Folks have been traumatized and damaged psychologically, financially, emotionally,” said Mr. Darst, the Morgan Stanley investment strategist. “I was just in Dubai and Saudi Arabia. I had a distinct impression that there was hopefulness about the size and structure of what’s next.”
http://www.nytimes.com/2009/02/07/your-money/07wealth.html?pagewanted=2&em

Hopefulness about the size and structure of what is next…keep that thought in mind as we all confront “present event bias” and the fears associated with engaging the markets.

Psyche, a philosophical allegory for investors

http://www.ft.com/cms/893ac9c8-757e-11dc-b7cb-0000779fd2ac.html

www.crinvestmentadvisors.com
International Investment Advisors

It is fascinating to observe more and more people from the United States begin to engage “Emerging Markets” and “Frontier Markets” . I am not refering only to buying shares in major corporations, but engaging property markets and people. It is as if the citizens of the United States are getting passports and going all over the world looking for opportunity and learning. Many of our people are even diversifying their residency, rolling up their shirt sleeves and diving into other countries. As they say, it is better late than never. It can be scary. It´s a big world out there and each culture plays by their own set of rules. But the Americans are quick learners and adaptable and it is a good thing because times are changing. Everybody has to look forward because there is no where to go back to. This is especially true for investors. The irony is that getting familiar with emerging markets, their leading companies and currencies is the safer posture. It is the only way to truly diversify, and access markets where there is capital appreciation while hedging against inflation. Like leaving the trenches to gain ground in a dangerous investment environment, one either moves forward or cuts and runs back in order to be shot by his own team. Investors…it is time to get educated, take responsibility to understand your investment decisions, control your own accounts and move forward into emerging markets because there is nothing to fear but fear itself.

Note:
The term emerging markets is used to describe a nation’s social or business activity in the process of rapid growth and industrialization. Currently, there are approximately 28 emerging markets in the world, with the economies of India and China considered to be by far the two largest. According to The Economist many people find the term dated, but a new term has yet to gain much traction.

The FTSE Group distinguishes between Advanced and Secondary Emerging Markets on the basis of their national income and the development of their market infrastructure. The Advanced Emerging Markets are classified as such because they are Upper Middle Income GNI countries with advanced market infrastructures or High Income GNI countries with lesser developed market infrastructures.

The Advanced Emerging Markets are: Brazil, Hungary, Mexico, Poland, South Africa, Taiwan.

The Secondary Emerging Markets are some Upper Middle, Lower Middle and Low Income GNI countries with reasonable market infrastructures and significant size and some Upper Middle Income GNI countries with lesser developed market infrastructures.

The Secondary Emerging Markets are: Argentina, Chile, China, Colombia, Czech Republic, Egypt, India, Indonesia, Malaysia, Morocco, Pakistan, Peru, Philippines, Russia, Thailand, Turkey.

The term “frontier markets” was coined by IFC’s Farida Khambata in 1992. It is commonly used to describe a subset of emerging markets (EMs). Frontier markets (FMs) are investable but have lower market capitalization and liquidity than the more developed emerging markets. The frontier equity markets are typically pursued by investors seeking high, long term returns and low correlations with other markets. The implication of a country being labeled as frontier is that, over time, the market will become more liquid and exhibit similar risk and return characteristics as the larger, more liquid developed emerging markets.

www.crinvestmentadvisors.com

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