Posts Tagged Emerging Market Investing
Avoiding EM Economies is the Biggest Gamble Of All
Posted by blodmell in Emerging Markets on February 8th, 2012
This Market Insight piece from the Financial Times by Jerome Booth
Avoiding EM economies is the biggest gamble of all is just that, insightful.
By Jerome Booth
Volatility looks likely to continue across equity markets in 2012. But the risks we typically care about most are large permanent losses, not volatility. There is a strong case that we do not face a plethora of potential large permanent losses from multi-country investing in emerging markets in 2012. We do from investing in the developed world.
The world this year will continue to be divided into deleveraging developed economies and emerging market economies without excessive debt. The US and Europe will continue to experience sub-trend growth, with the main risk still a return to recession or depression. Many emerging economies will grow close to trend, the main risks being country specific, not least inflation. Developed and emerging economies will continue to experience broadly synchronised intra-year inventory cycles due to the increasingly globalised nature of the manufacturing supply chain, but the underlying growth stories and the demand side conditions will continue to differ markedly.
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Emerging countries are highly heterogeneous and no longer share the common feature of potential default should they be cut off from foreign capital for the simple reason that they are now often the net creditors. All their main risk scenarios are either country specific, or emanate from the mess in the developed world. The former can be avoided by a portfolio investor, the latter scenarios all pose greater risks for those invested in the developed than in the emerging world.
Markets, though, are mainly driven by risk perception, not risk directly. Markets are likely to see more confusion in 2012 as previously stable mental constructs and views are found lacking, and then gradually replaced. Shifts in perception can be radical for the individual, yet the overall cumulative effect is gradual. Greatest actual risk – that is, the risk of not being repaid on an invested amount – is in those asset classes where a triple cocktail exists: a homogenous investor base; a large underperception of risk, which is likely to reverse; and leverage. All the main candidates are in the developed world.
Until a year ago there was little inflation in the emerging markets, hence no urgent need to appreciate currencies. There followed a period of central bank inertia as uncertainty in Europe trumped the desire to diversify from the dollar. At the end of 2011, inflation pressure has again subsided. In 2012, we expect the drift in events in Europe to lead to a more definitive resumption of confidence, or crisis followed by recovery. This should lead in due course to dollar weakness (including probably but not necessarily against the euro). A sudden yen appreciation, an announcement by a big central bank of substantial dollar holding reduction, or an oil price shock could precipitate more acute dollar weakness. Most likely, though, is a more gradual diversification and reduction of emerging market central bank reserves.
The most likely path for unwinding global imbalances over the medium term is through appreciation of emerging market currencies. We expect this process to be only temporarily interrupted by bouts of risk aversion. Over the medium term, as their currencies appreciate, emerging economies will gradually come to rely more on domestic demand. In order for this shift to be non-inflationary, there will be a greater focus on addressing supply-side constraints, particularly through reforms, the development of corporate bond markets, and big pushes into infrastructure investment.
Protracted weakness in developed world demand will also spur south-south investment and trade. Countries will make further efforts to shift trade patterns more to emerging markets. Emerging market banks will take more market share from developed market peers, possibly including through acquisitions. Policymakers may take the initiative in persuading more companies to invoice in non-dollar currencies. We could also see further diversification into emerging assets by emerging central banks.
Not investing significantly in emerging markets is a form of gambling. Yet denial of this reality is strong: people believe what they want to believe. The argument for hanging on to outdated and simplistic concepts of risk and to prejudices about emerging markets is driven by hope more than rationality. We fear to question our assumptions too closely. The gambler on a losing streak may shut off reality to feed the addiction.
How long should we stay at the roulette wheel when we know our returns are likely to be low even if we don’t lose everything? Do we think the status quo can last indefinitely and that the odds will continue to be rigged? Or do we just think we are lucky? Arguably, the more prudent are investing in emerging market asset classes to reduce risk – in cash markets, sovereign debt, corporate debt and, of course, equities for those with more of a stomach for short-term volatility.
Jerome Booth is head of research at Ashmore Investment Management
http://www.ft.com/intl/cms/s/0/22f91a6a-4c12-11e1-b1b5-00144feabdc0.html#axzz1lkwgTu3j
A General Client Update
Posted by blodmell in Uncategorized on May 11th, 2011
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.
Let’s Talk About Inflation
Posted by blodmell in Emerging Markets, Investment Advisory, Uncategorized on February 6th, 2011
I think inflation could emerge as the most serious risk to not only the global economy but especially emerging markets. It is forcing interest rates up so quickly after the crisis and has the potential to destabilize investment in every sense of the word. This is just not a commodity producer country problem though. We all know once the genie is out of the bottle “Houston, we have a problem”. As an investor, I try to cut through the macroeconomic picture, I try to ingore popular commentary and use a lot of common sense. Where are we going? Why did our portfolios not make 30% returns last year? Why are markets so volatile that they seem to be trying to make us all “traders”?
If one steps back for a moment and looks at the birds eye view of it all, it is really a quite remarkable evolution of events. The global economy was clipping along as it had through decades of the “business cycle” and suddenly a financial market driven crisis threw the entire economy into the most serious collapse since the great depression. Then, every central bank on earth dropped interest rates to zero, every meaningful government opened the flood gates of debt spending, “fiscal stimulus”, and new weapons such as “quantitative easing” dumped trillions of dollars of liqudity in the marketplace to force economic growth. Now, economic growth has returned, global debt is still a dilemna and the liquidity has brought inflation while interest rates are going up all over the world. My assessment is that these rate hikes are necessary and they are already taking their toll on emerging market equities. I think the drop in Brazilian bank share prices is especially notable. Nevertheless, the march will go on! The macroeconomic story is stable. It has been a frustrating market. Up, down, up, down. It begs the question “should we have taken profits?”. The answer is that we have to be long term and keep focused on the long term story of our hallmark marketplaces and the key energy, financial and material giants within them. As cliched as it sounds, “stay the course!”.
A lot Of “Consensus” Bank Research Is Pointing To Growth in US Equity Markets This Year While Inflation Fears Spook Emerging Markets
Posted by blodmell in Uncategorized on January 25th, 2011
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
Posted by blodmell in Uncategorized on October 26th, 2010
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
Ten Simple Reasons Why You Should Be Buying Emerging Market Equities Now
Posted by blodmell in Uncategorized on September 17th, 2010
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”
Mark Mobius, The Dean Of Emerging Markets, Just Revealed He´s Been Buying Like We Have ALL Last Month And Called It “A Correction In A Bull Market”
Posted by blodmell in Uncategorized on May 27th, 2010
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.”
Why Should I Be So Heavily Weighted In Equities Instead Of Having A Balance Portfolio With Bonds and Cash?
Posted by blodmell in Uncategorized on January 4th, 2010
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.
Another Headline, “Blackrock´s Doll Favors Emerging Markets.”
Posted by blodmell in Uncategorized on December 9th, 2009
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
Benjamin Reid Lodmell on, Market Volatility and Strengthening Your Investment Psyche
Posted by blodmell in Uncategorized on August 31st, 2009
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
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