Emerging Market Investing
January 2012
Michael Godfrey and Matthew Vaight, Co-fund managers
2
Agenda
• Why emerging markets matter
• What matters for emerging market investors
• Valuations
3
Why emerging markets matter Overview
Source: IMF, MSCI, Goldman Sachs Global ECS Research estimates, ML Calculations, BP, CIA World Factbook, IMF, MSCI as at 31 December 2010.
Emerging Market potential…
… not recognised by the market
PopulationLand Mass
FXReserves
GDPFull Market
CapMSCI AC
World
87% 81%
66%
37%
31%
13%
4
Many emerging market economies are relatively closed.
Domestic demand already a big driver of their economies.
Source: JPMorgan Economics, as at 31 Mar 11
Not just a global growth story
Why emerging markets matter
Total exports as % of GDP
0.0
20.0
40.0
60.0
80.0
100.0
120.0
5
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Emerging market exports to the US and EU (% of GDP) by region
Why emerging markets matter US and Europe weakness is not material
Source: JPMorgan Economics, as at 31 Mar 11
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World class companies
7
Agenda
• Why emerging markets matter
• What matters for emerging market investors
• Valuations
8 Source: HSBC as at June 2011
Economic growth has delivered lower shareholder returns Focus on what matters
Growth does not always create value
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0
1
2
3
4
5
Average holding period (years)
Market inefficiencies are best exploited by disciplined
stock selection
Source: World Federation of Exchanges, as at 31 December 2010. *M&G projected holding period for the M&G Asian Fund and M&G Global Emerging Markets Fund
Investing vs speculating Short-term nature of emerging market investors creates opportunities
10
“Made in…….” A history of low cost manufacturing
11
“Made in…….” A history of low cost manufacturing
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“Made in…….” A history of low cost manufacturing
13
“Made in…….” A history of low cost manufacturing
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Case study: Mindray Medical
0%
10%
20%
30%
40%
50%
60%
70%
YoY increase in R&D
Source: Credit Suisse HOLT as at December 2011. © 2011 Credit Suisse and its subsidiaries and affiliates. Used by permission. All rights reserved.
CFROI® is a registered trademark of Credit Suisse or its affiliates in the United States and other countries
“Made in…….”
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Corporate governance
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Corporate governance
0
10
20
30
40
50
60
70
80
China Russia Brazil Taiwan India SouthAfrica
Mexico
MSCI country indices -% of index under state control
State influence
Source: Deutsche Bank, June 2011
17
Corporate governance Case Study: Gazprom Vs. Vale
• Russian oil and gas major
• Largest natural gas co in the world
• 50 % owned by Russian government
• Brazilian miner
• 2nd largest mining co in the world
• Golden share held by the government
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Corporate governance
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Gazprom Vale
Return on Capital (%)
Case Study: Gazprom vs. Vale
Source: Credit Suisse HOLT as at 30 November 2011. © 2011 Credit Suisse and its subsidiaries and affiliates. Used by permission. All rights reserved.
CFROI® is a registered trademark of Credit Suisse or its affiliates in the United States and other countries.
Cost of
Capital
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The importance of valuations
Emerging market investors often overpay for growth.
However, markets reflect fundamentals over time.
Source: SG Equity Research as at September 2008, (1985-2007, % p.a.)
‘Value’ works in emerging markets
0
5
10
15
20
25
Growth Value
Emerging markets: returns across quintiles of value
20
Agenda
• Why emerging markets matter
• What matters for emerging market investors
• Valuations
21
Relative Performance
Source: Bloomberg, 31 December 2001 to 20 December 2011. Standard deviation and risk adjusted return calculated for the period.
Is such outperformance sustainable ?
A ‘lost decade’ for developed markets
0
50
100
150
200
250
300
350
400
450
Ind
exe
d t
o 1
00
MSCI World MSCI Emerging Markets
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Valuations
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
MSCI EM MSCI World
3.0
5.0
7.0
9.0
11.0
13.0
15.0
17.0
19.0
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
MSCI EM MSCI World
%
Source: Morgan Stanley 22 November 2011
Emerging markets are attractive given high returns
Trailing Price to Book Value Trailing Return on Equity
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Emerging markets Conclusions
Valuations ?
Valuations are
attractive given
fundamentals
Why invest ?
Companies
increasingly focused
on value creation
How we invest ?
Backing companies
we trust over the
long term
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An S&P Fund Management Rating represents an opinion only and should not be relied on when making an investment decision.
“S&P” and “Standard & Poor’s” are trademarks of The McGraw-Hill Companies, Inc. Copyright 2010 © Standard & Poor’s Financial Services LLC.
Source: M&G, Morningstar as at 30 November 2011. Ratings as at 30 November 2011 and should not be taken as a recommendation
Co-fund managers: Michael Godfrey and Matthew Vaight
Fund Launch: February 2009
Fund size: £548 million
Benchmark: MSCI Emerging Markets
Style: Bottom-up stockpicking
Number of stocks: 50 - 70
M&G Global Emerging Markets Fund Fund facts
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M&G Global Emerging Markets Fund Performance since launch*
Source: Morningstar as at 16 December 2011, Sterling A class shares, bid to bid, net income reinvested * The fund was launched in February 2009
80
100
120
140
160
180
200
220
240
M&G Global Emerging Markets Fund MSCI EM Mstar (IMA) Global Emg Mkts
Ind
exe
d to
10
0
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Prices may fluctuate and you may not get back your original investment.
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