We have arrived at a fairly positive prognosis for a number of emerging markets. Asian countries in particular have developed an attractive combination of resilience and growth potential.
With the driving force of Chinese growth, Asia’s intra-regional trade has grown from around 47% to around 58% of all the trade that is conducted in the region since 1990. This is even more significant when one considers that the absolute size of the Asian economy has grown enormously since then as well; China’s economy has rocketed from $361bn GDP in 1990 to $12,238bn in 2017 (1). Combining the two pairs of figures gives a somewhat simplistic indication that Asia’s self-contained regional trade has risen from $172bn to $7,098bn, a more than 40-fold increase in absolute terms.
International dependence is also reduced by virtue of emerging market countries having lower debt burdens. As we have seen, the more dollardenominated debt a country has, the more vulnerable it is to the rising value of the dollar.
The non-domestic debt burdens in Asian emerging markets is considerably lower than it was during the Asian financial crisis of 1996. By way of example, the Philippines, Thailand and India are all better placed than they were two decades ago. The large South Korean economy is slightly more indebted, but it registered a trade balance surplus of $95bn in 2017. The much smaller Malaysian economy has substantially expanded its debt burden, making it vulnerable to dollar value changes. This is a valuable warning that care still needs to be taken when selecting the companies and countries in which to invest.
That said, there would appear to be potentially attractive opportunities available in emerging markets. When compared to their developed market peers in North America and Western Europe, emerging market share prices are relatively cheap. For example, the price/earnings ratio (2) on the MSCI Emerging Markets Index was around 11 in August, while that for the MSCI World Index (including emerging and developed economies) was close to 16. Breaking this down, it means that if a share entitles the owner to $1 of profit, the emerging market company share will cost around $11 as opposed to the global average cost of $16.
In short, our analysis suggests that emerging markets offer a level of resilience that could provide investment opportunities as global economic growth slows over the coming months.
Our analysis also suggests that growth potential is built on this resilience. In 2018, stocks across different emerging markets underperformed their Western rivals as trade tensions and the rising value of the dollar unnerved investors.
We believe that this has sent emerging market stock prices down too far. This is borne out by the fact that share prices of US companies are running at substantially higher ratios than their book values (total value of net assets held) and the profits generated.
Emerging markets entail a broad church of countries, companies, risks and opportunities, so careful research and analysis are required before selecting appropriate investments. Assuming that such a process is implemented, we feel that emerging markets offer some solid opportunities for growth over the coming months.
The countries that make up around 60% of the emerging market stock values tracked in the MSCI Emerging Markets Index (a benchmark indicator) have current account surpluses, i.e. they are bringing more money in than they are spending (3).
Also, emerging market countries are much less dependent on exports of commodities (such as minerals and agricultural products) than they used to be. Therefore, these countries are less vulnerable to fluctuations in the demand for and price of such commodities.
In fact, there has been a surge in the production of technology and consumer goods. As a result, of the total amount of goods and services produced by emerging markets, energy and materials have fallen from a combined total of 27% in 1995 to around 15% today. Over the same period, consumer and technology goods and services have risen from 22% to 44% (4).
The significance of this lies in the likelihood that many investors and traders have not recognised this fact or, if they have, they have yet to adjust their portfolios to reflect where the growth is being generated.
We believe that this market mismatch represents an opportunity that we can investigate with a view to adjusting our asset preferences in anticipation of others
catching up with reality.
1. Source: World Bank Group website, accessed November 2018.
2. The price / earnings ratio is calculated using the share price divided by earnings per share (the latter equating to the amount of profit each share is entitled to).
3 & 4. Source: “EM: convention wisdoms versus the changing universe”, Alpine Macro, 23 October 2018.
Forecasts of future performance are not a reliable guide to actual results in the future, neither is past performance a reliable guide to future performance. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed. Any views expressed are our in-house views at February 2019.
Investment markets and conditions can change rapidly and the views expressed should not be taken as statements of fact nor relied upon when making investment decisions. This information may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.
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