Emerging markets recovered faster and stronger from the global financial crisis than developed economies.
The rebalancing of the global economy is a key reason Natixis Global Associates is witnessing greater interest in investing in emerging markets from institutional, retail and wholesale clients. In particular, institutional investors are increasingly allocating to emerging markets on a long-term strategic basis rather than as a short-term tactical move.
Emerging market economies now account for some 50% of global GDP growth, a percentage level expected to only rise in the coming years as domestic consumption overtakes exports as the main growth driver in developing economies We expect emerging market equities to be an area that will provide significant opportunity for global investors in the new decade.
Ron Holt, CEO of Hansberger Global Investors, points out that emerging markets have really been the stars in the recovery phase. It has been the developed world that suffered the most from the crisis – and in all likelihood will take longer to recover. In fact, according to consensus research, GDP estimates for 2010 predict Brazil growing close to 5%, China potentially exceeding 9% and India at around 7.5%. That contrasts with GDP estimates for many developed nations, where France, Germany and the UK are expected to grow around 1% and the US at 3%.
Overall, the BRIC nations (Brazil, Russia, India, China) appear to have superior economic growth rates. Hansberger’s Holt believes it will be that way for the next several decades, as we are witnessing a big portion of the world’s population in these four countries moving from an emerging state or an underdeveloped state to one where they are very quickly developing a significant level of middle class, infrastructure, and the overall economy.
The perception of higher levels of risk in emerging markets may not be accurate anymore, according to Holt. For example, as we come through this most recent financial crisis and look at what has happened in the global economy, the real epicenter of the crisis was in the US and the developed world. Therefore, he cautions investors may now be underinvested in this asset class.
Asia continues to be key growth driver
Growth opportunities in China should be particularly appealing over the next few decades considering the demographic shifts under way. China has some 1.3 billion people but only about 300–400 million of those are in what we would call the real economy. The remainder of the population continues to live in the agrarian economy, and we believe there is opportunity to bring more people into the developing part of the economy, which should be a long-term process.
Bill Sung, CEO of Singapore-based Absolute Asia Asset Management, recognises global investors are concerned about both valuations and the sustainability of the economic growth in China after 2009’s strong stock market performance. However, he remains confident about the prospects for Chinese markets through the first half of 2010 and beyond.
While Absolute Asia’s key investment theme last year was economic recovery stimulus – focused on companies involved in infrastructure development and in the property sector – they are shifting focus more toward a domestic consumption theme for 2010. With most of the Chinese government’s 4-trillion-yuan fiscal stimulus package implemented in 2009, Sung expects the impact on fixed-asset investments, such as infrastructure-related firms, will tail off in the second half of 2010.
Going forward, domestic consumption is seen as a key growth generator for China. Sung suggests if the Chinese people regain individual economic confidence and save less, it is very likely that the consumption share of the Chinese GDP could rise from its rock-bottom record of 35.3% in 2007 to a more normal 50% threshold, providing a major growth driver for the Chinese economy in the next ten years.
Other sectors that continue to look attractive to Sung in 2010 include natural resources companies, such as copper producers in Australia. Gold also looks attractive due to increased governmental interest in the region, particularly China, in building a greater supply of gold in response to global economic instability.
Consumption theme emerging in Latin America
Brazil, which was one of the last countries to enter the global downturn and one of the first out, is in the enviable position of having natural resources such as iron ore and oil. In addition, it has a large and rather young population, and we continue to see this market develop as the middle class develops.
After witnessing Latin America markets as a whole return about 100% in 2009, Francisco Alzuru, Managing Director of Emerging Markets Research at Hansberger Global Investors, expects 2010 to be a much more subdued year in the region.
Alzuru, a native of Venezuela, sees local consumption as a key theme in the region. It supports the rapid and structural development of the pension-fund industry, sustained by growing savings and the urbanisation of rural areas. He also points out the enormous infrastructure needs in the region have resulted in the initial public offering of more than 200 companies since 2007.
Value opportunities in Emerging Europe
The Emerging Europe zone appears to be offering an interesting level of discount compared with other emerging markets around the globe, according to François Théret, Emerging Europe Portfolio Manager at Natixis Asset Management in Paris.
Consensus estimates from the Institutional Brokers’ Estimate System (IBES), which Théret believes are not overly aggressive, show the Emerging Europe equity markets, as measured by the MSCI Emerging Europe Index, are currently trading at an attractive 8.8 times earnings for 2010. By contrast, Emerging Asia is trading at 13.4 times earnings and Latin America is trading at 14.8 times earnings for 2010.
Recovery in global growth in 2010 is expected to boost Russian exports of oil and raw materials. “Coupled with the normalisation of the Russian credit market, this increase in exports could also help to kick-start investment, especially in the oil sector, benefiting oil services companies and pipe producers such as TMK (Russia’s largest manufacturer and exporter of steel pipes),” said Théret.
Another area our Emerging Europe experts are identifying real value potential in is banks with healthy capital situations positioned to benefit from increased penetration of financial services. Bank stocks they currently find attractive in the region are Garanti Bank in Turkey, Bank Millennium in Poland and Sberbank in Russia.
From Latin America to Asia and Eastern Europe, emerging markets may present significant growth potential. However, each developing economy offers its own opportunities and obstacles. That’s why it makes sense to find an expert to help you navigate through it all.
