Special RepoRt pa emeRging maRketS inveStoR bReakfaSt foRum 2008
Scott Leiberton, Principal
Global Investors
François Théret, Natixis Global
Associates
Hugh Hunter, West LB Mellon
Asset Management
The link between economic
growth and market
cap is broken as well,
according to Leiberton.
Emerging markets contribute
one-third in nominal
terms to global GDP, more
if readjusted for currency
differences, but only 12%
of market cap. By comparison,
the US provides 26%
of the GDP and 42% of
equities by market cap.
He also argues that the
sector and stock selection
is becoming more important
than whether an investment
is in either a developed
or developing market.
He gives the example of
Hong Kong and Taiwan as
being among the more
developed economies in
the world but are still classified
as ‘developing’.
He urges investors to
not necessarily look at traditional
state boundaries.
“BRIC is largely an oil
and cyclical industry play
rather than four emerging
economies, but if it was
marketed like that it would
not have sold as well,” he
suggests. “Treat the world
as a neutral allocation and
do not segment it into arbitrary
developed or developing
categories.”
Leiberton concludes that
there are good long-term
opportunities in the emerging
countries but timing
any investment entry right
now is difficult as it is
tough to pick the bottom
of the market.
“These are some of the
best valuations we have
seen in our careers but to
go in now could see investors
actually lose out.”
François Théret, emerging
Europe equity portfolio manager,
Natixis Global
Associates
Russia has taken one hell
of a beating in the past two
or three months and the
immediate outlook is not
global gDp
Japan 8%
Emerging markets 31%
US 26%
Source: Principal Global Investors, World Bank
much better, as Théret
points out. He describes
Russia as “everyone’s darling”
in 2007, following the
general election, the
smooth transition of Putin
from president to prime
minister, GDP growth at
7% to 8% and a global
energy boom supported by
Russia producing 15% of
the world’s fossil fuels.
It was not exposed to
sub-prime credit problems
and given that only 4% of
its exports go to the US,
the failings of the world’s
largest economy did not
have as dramatic an affect
as they did elsewhere.
That was the story up to
the first half of 2008. Since
its peak in May, the stock
market is down 70%; the
oil price decline has hit its
exports hard; and the South
Ossetia conflict contributed
global market equity cap
Japan 9%
US 42%
Emerging
markets 12% Europe 29%
Source: Principal Global Investors, MSCI
16 POrTFOLIO ADVISer [www.portfolio-adviser.com] December 2008
Other developed 4%
to concerns over hardearned
political stability.
Théret says that a few
more positive signals need
to be given before Russia
becomes a more attractive
investment. A stable oil
price is almost a necessity
– the cut-off price for
Russia to be in surplus is
$70 a barrel whereas it is
currently closer to $60.
There is huge growth
potential, with a number of
great companies, particularly
the State-owned ones.
But the over-riding problem
is the high level corporate
governance risk meaning
that stock-specific
investment is problematic.
Hugh Hunter, head of global
emerging markets, West LB
Mellon Asset Management
Hunter’s opening question
was: “Are we at the start of
Europe 31%
Other
developed 8%
a new era for emerging
markets?”.
“No” was his immediate
answer. What we are
seeing, he says, is a pretty
substantial blip in what
was a very positive story
for global emerging markets
at the hands of a US
and developed worlddriven
crisis.
What is called for, he
suggests, is for credit to be
extended, especially for
the intra-bank and corporate
paper markets. It is
starting to happen but
Hunter would like to see it
speed up.
He also wants analysts
and economists to ‘keep
things real’ as some are
basing forecasts on oil,
for example, being at $100
a barrel when it could
just as easily be at $40 or
$50 a barrel.
Their negative comments
about global markets
also hide the fact that
there is still positive growth,
he argues, adding that the
slowdown may last another
12 months but it is just
that – a slowdown rather
than an abrupt halt.
Global emerging markets
are still sound, they
have a better base than
developed markets and
any resurgence starts with
a positive balance sheet,
not an overdraft. He
emphasises that emerging
markets will have a more
important role to play in
the future with company
valuations already pricing
in a lot of bad news.
“We are close to a great
buying opportunity, as in
12 months time equity
markets could rise substantially,”
he says.
“Is this a new era for
emerging markets? Not necessarily,
but we will eventually
look back at this hideous
correction and recognise
a long-term secular
bull market.”
To view a Ceros magazine you need to have JavaScript enabled in your browser and have the flash player 8 or higher installed. To install the latest flash player, click the icon above, install the flash plugin and then click here to refresh this page.