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Emerging Markets Outlook By Peter Urbani 25 November 2011

Emerging markets outlook ( Oct 2011 )

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Page 1: Emerging markets outlook ( Oct 2011 )

Emerging Markets Outlook

By Peter Urbani

25 November 2011

Page 2: Emerging markets outlook ( Oct 2011 )

Why Emerging Markets ?

“A significant transformation of the global economy is well under way. Growth market economies will be the driver of the world economy in the coming decade.” 

- Jim O'Neill*, Chairman, Goldman Sachs Asset Management

*Author of : Building better Economic BRICS

Page 3: Emerging markets outlook ( Oct 2011 )

Why Emerging Markets ?

Source: IMF - WEO Forecasts Sep 2011

World GDP Share ( PPP )

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

%

Major advanced economies (G7)

Emerging and developing economies

Page 4: Emerging markets outlook ( Oct 2011 )

Why Emerging Markets ?

Source: Angus Maddison, The World Economy: A Millennial Perspective p262, IMF - WEO Forecasts Sep 2011

History of World GDP Share

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1500 1600 1700 1820 1870 1913 1950 1973 1998 2008 2016

%

UK

USA

Japan

China

India

Page 5: Emerging markets outlook ( Oct 2011 )

Why Emerging Markets ?

Page 6: Emerging markets outlook ( Oct 2011 )

BRIC and Emerging – High Growth

Page 7: Emerging markets outlook ( Oct 2011 )

Deflationary forces still in place

Page 8: Emerging markets outlook ( Oct 2011 )

EM do not share the Debt problems

Page 9: Emerging markets outlook ( Oct 2011 )

Developed Markets Outlook

Page 10: Emerging markets outlook ( Oct 2011 )

Emerging Markets Outlook

Note: GDP and Pop weights grossed up from 90.865% and 70.154% respectively to reflect missing countries. Total World GDP 70,012 Bn

Page 11: Emerging markets outlook ( Oct 2011 )

What are ‘Emerging Markets’ ?

Source: MSCI

Page 12: Emerging markets outlook ( Oct 2011 )

Why Emerging Markets ?Emerging Markets relative to MSCI World

20

70

120

170

220

270

320

370

420

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

EM Outperformance

MSCI EM relative to MSCI World

Source: MSCI

Page 13: Emerging markets outlook ( Oct 2011 )

Why Emerging Markets ?

MSCI World v.s. Emerging Mkts

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

1400.00

1600.00

1800.00

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

MSCI Emerging Mkts CAGR: 11.3% Ann. Vol : 24.2%

MSCI World Index CAGR: 6.3% Ann. Vol : 15.6%

Source: MSCI

Page 14: Emerging markets outlook ( Oct 2011 )

US ‘Strong Dollar Policy’ a major driver

US Trade Weighted Dollar Index

60

70

80

90

100

110

120

130

140

150

73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

NBER Recessions

US Trade Weighted Exchange Index:Major Currencies

Source: MSCI , US Federal Reserve

Page 15: Emerging markets outlook ( Oct 2011 )

US ‘Strong Dollar Policy’ a major driver

US Trade Weighted Dollar Index

60

260

460

660

860

1060

1260

1460

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

60.00

70.00

80.00

90.00

100.00

110.00

120.00

MSCI Emerging Mkts

US Trade Weighted ExchangeIndex: Major Currencies

Source: MSCI , US Federal Reserve

Page 16: Emerging markets outlook ( Oct 2011 )

Developed Markets Performance

Source: MSCI

Page 17: Emerging markets outlook ( Oct 2011 )

Emerging Markets Performance

Source: MSCI

Page 18: Emerging markets outlook ( Oct 2011 )

Market Inefficiencies ?

Source: MSCI , US Federal Reserve

Alternative Index Weighting Methods

0

100

200

300

400

500

600

700

00 01 02 03 04 05 06 07 08 09 10 11

EM (EMERGING MARKETS) GDP WeightedCAGR: 12.6% Ann. Vol : 25.3%

EM (EMERGING MARKETS) Equal WeightedCAGR: 16.0% Ann. Vol : 23.3%

EM (EMERGING MARKETS) IMI(Large+Mid+Small Cap) None CAGR: 10.1% Ann. Vol : 25.0%

Page 19: Emerging markets outlook ( Oct 2011 )

Market Inefficiencies ?

Source: MSCI , US Federal Reserve

Size Biases - Large - Mid - Small

0

50

100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11

EM (EMERGING MARKETS) Large Cap NoneCAGR: 3.4% Ann. Vol : 17.6%

EM (EMERGING MARKETS) Mid Cap NoneCAGR: 6.4% Ann. Vol : 18.6%

EM (EMERGING MARKETS) Small Cap NoneCAGR: 5.5% Ann. Vol : 18.4%

Page 20: Emerging markets outlook ( Oct 2011 )

Market Inefficiencies ?

Source: MSCI , US Federal Reserve

Style Bias - Value - Growth

0

50

100

150

200

250

300

350

00 01 02 03 04 05 06 07 08 09 10 11

EM (EMERGING MARKETS) IMI(Large+Mid+Small Cap) Growth CAGR: 1.3% Ann. Vol : 18.3%

EM (EMERGING MARKETS) IMI(Large+Mid+Small Cap) Value CAGR: 7.6% Ann. Vol : 16.8%

Page 21: Emerging markets outlook ( Oct 2011 )

Over the longer term there is clear bias towards Value

And a general aversion to Growth*

* This may just represent the last 10 years poor market conditions

USD

Page 22: Emerging markets outlook ( Oct 2011 )

Over the shorter term there has been some appetite for more Growth probably reflecting investors hunt for yield

Large Cap interest may reflect investor concerns over liquidity

USD

Page 23: Emerging markets outlook ( Oct 2011 )

Conclusions• Short term weakness for Emerging Markets likely to persist as

USD continues to rally into mid 2010

• Longer term outlook remains for Emerging Markets to continue grow at a faster, albeit slower than historical, rate relative to developed markets

• Clear Value bias in EM but with recent trends there has been some appetite for Growth and a preference for Large Cap probably reflecting investor appetite for yield and liquidity concerns

Page 24: Emerging markets outlook ( Oct 2011 )

Peter (‘Pietro’) Urbani• Chief Investment Officer (CIO) – Infiniti Capital $3bn Fund of Hedge Funds Group

Head of Quantitative Research – Infiniti Capital

• CEO – KnowRisk Consulting – Risk and Asset Consulting

• Head of Investment Strategy – Fairheads Asset Managers HNW Trust and Investment BoutiqueHead of Research – Fairheads Asset Managers

• Head of Portfolio Management – Nexus Securities

• Senior Portfolio Manager – Commercial Union – Superfund

• Equities Dealer – Junior Portfolio Manager – Mathison & Hollidge Stockbrokers

http://nz.linkedin.com/in/peterurbani