THE CONTRARIAN EMERGING MARKETS
SUMMARY
The investment theme of
the moment is that of Brazil,
Russia, India and China and
the rest of the emerging
markets as economic power
continues to move from West
to East.
The downside of such a
positive, shared opinion, is
that this is already priced in to
stock prices thereby lessening
the relative value of the
investment.
Investors should tread
carefully and make sure
they avoid putting all their
equity investments in a single
emerging market basket.
global emerging market
universe, Chinese public
equities are currently
not terribly inexpensive.
Chinese companies are not
enormously focused on
profitability. They tend to
be more focused on revenue
and earnings growth,
often in industries that are
growing very quickly. But
that attracts a lot of competitors,
and margins and
profitability are quite low.”
He also holds just 4% in
India as he sees relatively
few opportunities among
companies he suggests are
already on quite high valuations.
His majority holding
is 19% in Brazil.
l India and services
India is an interesting
case as, of all the BRIC
countries, it is the only
services-reliant one. Brazil
and Russia are commoditydriven,
while the growth
story behind India is one
of its service industries and
a growing middle class.
There are those who
like it, such as Michael
Howell, managing director
at CrossBorder Capital:
“We are overweight India
as we think it is, relative to
the rest of BRIC, less overowned,
though there has
been less euphoria about it
of late,” he says.
l Fanning the flames
There are those who are
positive but guarded.
“What worries me about
India is, in the short term,
the policy stance is completely
wrong. There is a
genuine inflationary problem
and it is over-heating,”
according to Peter Bickley,
chief strategist at Deutsche
Bank PWM. “Also, the
Central Bank just seems
to be pouring paraffin on
the flames, suggesting at
some point there will be
a nasty gear change that
could mean the economy
crunches in 2010-11. It may
not worry you too much if
you are a firm believer
in the long-term, strategic
structural story, which
I sort of am,” he says,
before concluding: “If they
get it right economically it
will be a great investment
story. But they might not
get it right.”
Russia is the one territory
where professional
GDP based on purchasing power parity (PPP) per capita ($)
Country ’06 ’07 ’08 ’09 ’10 ’11 ’12
Brazil 9,167.51 9,854.32 10,465.80 10,455.60 10,882.43 11,327.33 11,838.60
Russia 13,223.15 14,765.56 15,947.94 15,039.05 15,616.55 16,370.63 17,338.29
India 2,320.73 2,572.55 2,779.91 2,932.49 3,124.76 3,354.08 3,625.69
China 4,659.15 5,389.22 5,970.29 6,546.30 7,210.39 7,985.21 8,882.75
United Kingdom 33,877.58 35,512.01 36,357.79 35,164.98 35,901.65 37,191.62 38,804.86
United States 44,857.42 46,673.95 47,439.93 46,442.64 47,400.35 48,918.41 50,588.06
Source: International Monetary Fund, World Economic Outlook Database, Oct ’09
Emerging market indices
Since 3 Since 15 Since 1 3 year 5 year 10 year
Mar ’09* Sep ’09** Dec ’01***
FTSE 100 54.40 4.76 34.30 -4.06 34.59 8.64
MSCI BRIC 87.88 12.51 404.44 59.23 253.15 n/a
MSCI EM (Emg Mkts) 78.65 9.44 248.55 43.22 155.98 165.41
MSCI World Index 44.12 4.64 17.77 1.48 34.08 4.00
Total Return Bid-Bid performance from UK Retail UT and OEICs universe. Rebased in Pounds Sterling
Source: Finanical Express Analytics. * Market low ** Lehmans bankruptcy *** Term ‘BRIC’ coined
Emg mkt equities vs dollar & commodities
investors recognise that
opportunities exist, but they
have to walk in with their
eyes wide open. While it
is highly correlated to the
volatile price of oil, it is one
of the cheapest markets in
the world. But, as Nigel
Cuming, chief investment
officer at Collins Stewart
Wealth Management, says:
“You need a very actively
managed fund if you are
going into Russia.”
To illustrate the point,
let’s look at the one fund
that has put Russia on the
investment map, Robin
Geffen’s Neptune Russia
& Greater Russia Fund. Its
discrete annual performances
since launch have
been 66% (in calendar
year 2005), 57% (2006),
35% (2007) and then a
thumping loss of 61% in
2008. Year-to-date it is up
over 100%.
Brazil, a heavy commodity
play, is a true
emerging market come
good, which means it is
no longer cheap. If there
is a weakness, it is from
the uncertainty thrown up
from the general election it
will hold next year, as well
as the way it seems to be
discouraging new foreign
investment by imposing a
2% tax effective on money
entering the country for
equity and fixed income
investment.
40 PORTFOLIO ADVISER [www.portfolio-adviser.com] JANUARY 2010
500
400
300
%
200
100
US dollar*
Commodity prices**
Emerging market equities***
0
'85 '89 '93 '97 '01 '05 '09
Source: CrossBorder Capital. * Bank of England trade-weighted
dollar (US) index. ** CRB Index. *** Datastream
l Developed countries
One thing is certain, the balance
of money is now starting
to come out of emerging
markets and is moving
towards developed countries.
Caspar Rock, deputy
chief investment officer at
Architas, explains: “I follow
a flow of fund service provided
by State Street. It is
a good leading indicator
– it said to buy investment
banks at the end of Feb
2009; it told you to buy
UK retail in summer 2008,
both have done incredibly
well in the period thereafter.
In the past month or
two, flows have been going
from emerging market to
developed, the last time it
said this was in Q2 2008.
“I think emerging market
debt is attractive on a riskadjusted
basis. I believe
growth will be faster, and
currencies will go up. I
think government finances
are in much better shape
than they are in the developed
world and you get a
higher yield.”
Most investment commentators
are largely bullish
on BRIC and are supporters
of a continued emerging
market growth story. Yet
they are the same commentators
who remember the
gains made between 2002
and 2007 all wiped out in
one very bad year.
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