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ECONOMICEXPOSURETOEMERGINGMARKETS
PARADIGMSHIFTMOSCOW2012
Aparadigmshi,isaradicalchangeinpersonalbeliefs,complexsystemsororganizaMons,replacingtheformerwayofthinkingororganizingwitharadicallydifferentwayofthinkingororganizing.ThinkofaParadigmShiRasachangefromonewayofthinkingtoanother.
ThomasKuhn
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WHATAREEMERGINGMARKETS?Inthe1970sthecommontermwas• "lesseconomicallydevelopedcountries"(LEDCs)Thetermwascoinedintheearly1980sbyAntoinevanAgtmael,• thenworkingfortheWorldBank’sIFC.Emergingmarketsassociatedto:• theAsianMgereconomies,• BRIC(Brazil,Russia,IndiaandChina)coinedbyGS,• “fronMer”markets(itisnotcleariftheyyetdeservetobecalledemerging).PoliMcalscienMstIanBremmer:• "acountrywherepoliMcsmabersatleastasmuchaseconomicstothe
markets”.
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NEXTELEVENNewtermshaveemerged:• BRIC‐Brazil,Russia,India,andChina,• BRICET(BRIC+EasternEuropeandTurkey),• BRICS(BRIC+SouthAfrica),• BRICM(BRIC+Mexico),• BRICK(BRIC+SouthKorea),• NextEleven(Bangladesh,Egypt,Indonesia,Iran,Mexico,Nigeria,Pakistan,
Philippines,SouthKorea,Turkey,andVietnam)• CIVETS(Colombia,Indonesia,Vietnam,Egypt,TurkeyandSouthAfrica),• NIC(NewlyIndustrializedCountries),
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WHOOWN“EMERGINGMARKETS”???ThebestguidestendtobeinvestmentinformaMonsourceslike• ISIEmergingMarkets,• theEconomist,• marketindexmakers(MorganStanleyCapitalInternaMonal),• raMngsagencies(S&P).
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WHEREMONEYFLOW???90%ofEMmanagersuseMSCIindexes:
– SouthKoreaandTaiwan–30%,– Asia–52%,– LaMnAmerica–20%,– theBRICs–37.5%.
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EMISWHEREYOURMONEYHAVETOBE…
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WHEREISTHEBEEF?!EMgrewby270%throughlastdecade.ShortrunfluctuaMonsarecausedby:• P/EfluctuaMons.Whereas…Equitymarketlong‐termreturnisexplainedby:1. Earninggrowth,2. Dividends
ECONOMYGROWTHMATTERS!!!
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WHATMAKESTHEMGROW?Whateconomistsagreewithis• suchcountriesareconsideredtobeinatransiMonalphasebetween
developinganddevelopedstatus.Whileresearchers,includingseveralprofessorsfromHarvardBusinessSchoolandYaleSchoolofManagement,havedescribedacMvityincountriessuchasIndiaandChina…
…itiss/llli1leunderstoodhowamarketemerges?
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HARROD–DOMARMODEL
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THESOLOWMODEL
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THERAMSEYGROWTHMODEL
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AKMODEL
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GROWTHDRIVERS–NOCONSENSUS
CAPITALACCUMULATION
R&DandINNOVATION
HUMANCAPITAL
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Theywanted…Theyjustwereallowed…
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ECONOMICGROWTH‐CHINA
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USBABY‐BOOMERS
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WHO’SACULPRIT???
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HOUSEHOLDFORMATION
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FALLINGINFLATION
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BOOMINGCONSUMPTION
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BANKLOANBOOMING
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SOLIDARITYSYSTEMEXPANSION
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HOUSEHOLDDEBTOUTSTANDING
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USNATIONALDEBT
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PERSONALSAVINGSAS%%OFDISPOSABLEINCOME
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HIGHERSPENDINGLEAKSABROAD
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PRESSYOURLUCK
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SHAREOFGLOBALMANUFACTURINGOUTPUT
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MOVEPRODUCTIONOUTTOLOWCOSTNATIONS
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RMBREALEFFECTIVEEXCHANGERATEINDEX
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VICIOUSCYCLE
USconsumers
Chinaproducers
PBCUSGovernment
USbanks
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FOREIGNEXCHANGERESERVES
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USTOTALDEBTSTRUCTURE
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CHINESEFOREIGNASSETS
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INNOVATIVEBANKING
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REALESTATEBUBBLE
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USGDPVS.PERSONALINCOME
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USGDPADJUSTEDFORDEBT
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GLOBALIMBALANCES(%OFWORLDGDP)
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CHN+EMA:China,HongKongSAR,Indonesia,Korea,Malaysia,Philippines,Singapore,TaiwanProvinceofChina,andThailand;US:UnitedStates;DEU+JPN:GermanyandJapan;OCADC:Bulgaria,CroaMa,CzechRepublic,Estonia,Greece,Hungary,Ireland,Latvia,Lithuania,Poland,Portugal,Romania,SlovakRepublic,Slovenia,Spain,Turkey,andUnitedKingdom;OIL:Oilexporters;ROW:restoftheworld.
BUBBLEBURST
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FINANCIALCONTAGION
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NETWEALTHREDUCTION
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FEDERALRESERVE’SPREGNANTBALANCESHEET
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ECBANDBOE
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MONEYFLEEFROMECONOMY
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DELEVERAGING???REALLY!?
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PARADIGMSHIFTS
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PROCESSWILLEXPAND
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BABY‐BOOMERSRETIRE
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TOTALDEBDAS%%OFGDP
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SOMEONEHAVETOSPEND
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EMWILL???
!
Exhibit 2 By 2025, the consuming class will swell to 4.2 billion people. Consumption in emerging markets will account for $30 trillion—nearly half of the global total.
Compendium$30 trillion decathlonExhibit 2 of 5
World population, billions World consumption, $ trillion
Consuming class1
Below consuming class1
0.3
1950
2.5
2.2
1970
3.70.9
2.8
1990
5.2
1.2
4.0
2010
6.8
2.4
4.4
20252
7.9
4.2
3.7
2010
38
12
26
20253
64
30
34
Emerging markets
Developed markets
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WAGEISGROWINGINEM
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LABORCOSTADVANTAGESHRINKS
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TOSPENDCONSUMERSNEEDINCOME
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ANDNOTONLYCHINA
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SHALLTHISREVERT???
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FIXEDASSETSINVESTMENT
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WHATABOUTCOMPETITION???
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HUMANCAPITAL
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WHATABOUTEXPECTEDRETURN???
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HFMANAGERJONATHANBINDER:“investorswillnotnecessarilythinkof"G10"(orG7)versus"emergingmarkets”.“Instead,peopleshouldlookatthecountriesthat• arefiscallyresponsibleversus• countriesthatarenot.”
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ONEPOTENTIALSCENARIO–RENTIERNATION
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THANKYOUFORYOURATTENTION!!!
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OlegShenker,CFARedValueCapitalPartnersManagingPartner+7(985)2310342
