Emerging Markets Outlook

By Peter Urbani 25 November 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

Why Emerging Markets ?
%
60.0 55.0 50.0 45.0 40.0 35.0 30.0 25.0 20.0 Major advanced economies (G7) Emerging and developing economies

World GDP Share ( PPP )

Source: IMF - WEO Forecasts Sep 2011

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16

Why Emerging Markets ?
%
35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1500 1600 1700 1820 1870 1913 1950 1973 1998 2008 2016 UK USA Japan China India

History of World GDP Share

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

Why Emerging Markets ?

BRIC and Emerging – High Growth

Deflationary forces still in place

EM do not share the Debt problems

Developed Markets Outlook

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

What are „Emerging Markets‟ ?

Source: MSCI

Why Emerging Markets ?
Emerging Markets relative to MSCI World
420 EM Outperformance 370 MSCI EM relative to MSCI World 320

270

220

170

120

70

20 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Source: MSCI

Why Emerging Markets ?
MSCI World v.s. Emerging Mkts
1800.00 1600.00 1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00 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

US „Strong Dollar Policy‟ a major driver
US Trade Weighted Dollar Index
150 NBER Recessions 140 US Trade Weighted Exchange Index: Major Currencies 130

120

110

100

90

80

70

60 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

Source: MSCI , US Federal Reserve

US „Strong Dollar Policy‟ a major driver
US Trade Weighted Dollar Index
1460 120.00

MSCI Emerging Mkts
1260

US Trade Weighted Exchange Index: Major Currencies
1060

110.00

100.00 860 90.00 660 80.00 460

260

70.00

60 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

Source: MSCI , US Federal Reserve

Developed Markets Performance

Source: MSCI

Emerging Markets Performance

Source: MSCI

Market Inefficiencies ?
Alternative Index Weighting Methods
700

EM (EMERGING MARKETS) GDP Weighted CAGR: 12.6% Ann. Vol : 25.3% EM (EMERGING MARKETS) Equal Weighted CAGR: 16.0% Ann. Vol : 23.3%

600

500

400

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

300

200

100

0 00 01 02 03 04 05 06 07 08 09 10 11

Source: MSCI , US Federal Reserve

Market Inefficiencies ?
Size Biases - Large - Mid - Small
350

EM (EMERGING MARKETS) Large Cap None CAGR: 3.4% Ann. Vol : 17.6%
300

250

EM (EMERGING MARKETS) Mid Cap None CAGR: 6.4% Ann. Vol : 18.6% EM (EMERGING MARKETS) Small Cap None CAGR: 5.5% Ann. Vol : 18.4%

200

150

100

50

0 00 01 02 03 04 05 06 07 08 09 10 11

Source: MSCI , US Federal Reserve

Market Inefficiencies ?
Style Bias - Value - Growth
350

300

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%

250

200

150

100

50

0 00 01 02 03 04 05 06 07 08 09 10 11

Source: MSCI , US Federal Reserve

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

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

Conclusions
• Short term weakness for Emerging Markets likely to persist as USD continues to rally into mid 2012 • 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

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 Boutique Head 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

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

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