Invesco Global Emerging Markets Strategy November 2018 Doug Turnbull This presentation is for Professional Clients only and is not for Senior Analyst consumer use.
Caught in a Trap, or Islands in the Stream Looking for the opportunities after a tougher 2018 1 Challenges and opportunities from volatility’s return § Crises to avoid § Unjustified contagion to benefit from § Misplaced fears 2 The broader investment case for Global Emerging Markets § Valuation for this point in the cycle 3 The Invesco GEMs proposition to benefit from that § What defines us and our investment approach § The product set and its key characteristics § How we are currently positioned Opportunities are to be found between the headlines and the reality today 2
Challenges to avoid and opportunities to pursue
Turkey – an idiosyncratic own goal An avoidable political crisis some time in the making § Growth has been stimulated for too long to create Turkey: GDP & Current Account Balance electoral success 20% 5% 10% 0% § And relied on foreign funding for their large current 0% account deficit -5% -10% § Result is high inflation and currency depreciation -20% -10% Mar-91 Aug-96 Feb-02 Aug-07 Jan-13 Jul-18 GDP, LHS (5 y/y 3qma) Current account balance, RHS (12m, % of GDP) § Rebalancing through some fiscal discipline and high rates can work, but is painful now Turkey: FX vs PPI inflation 300 100% § Focused on good companies at great valuations 200 50% 100 0% 0 -50% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 FX rate index, LHS, (EOP, Jan 2010=100) PPI inflation, RHS, % 3mma Source: Emerging Advisors Monthly GEM Chartbook September 2018. 4
Coca Cola Icecek – looking for safe bargains Opportunities do still exist in Turkey Company fundamentals: § 50% of sales from Turkey in resilient category, helped by tourism 50% overseas in MENA countries with fast growth from low penetration levels § ‘Crisis’ impact: § Reduced exposure to forex debt Strong pricing power at low ticket level § § Most costs are Lira denominated Company valuation: § Gone from being the most expensive to cheapest Coke bottler in the world § CFO: “We’re a 10-country Coke bottler valued at just $1bn. Unheard of.” Source: Invesco as at 30 September 2018. 5
South Africa and Russia Babies in the bathwater? § Rand liquidity and bond market depth hurting § Russia supported by strong oil price SA as a proxy § The risk of sanctions is casting a long shadow § Removal of Zuma does help; institutional § But valuations are (more than) reflecting that credibility maintained § Seeing attractively priced opportunities to add names 90 100 110 120 130 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 Aug 18 Sep 18 South African Rand Russian Ruble Source: Bloomberg as at 15 October 2018. 6
Sberbank – considering the facts Sanctions impact: § Sanctions on banks directly would be economic warfare More likely are tough but targeted moves § Company fundamentals: § Strong brand and dominant market share World-leading tech capabilities § § Russian growth supported by oil, with upside risk from structural reform Russia is still under-banked § § Owned by the Central Bank Company valuation: Dividend yield ~10%, 5x Price/Earnings § Source: Invesco as at 30 September 2018. 7
China – credit growth has been slowing Growth rate (%y-o-y 3mma) 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 PBC "Total social finance" Source: Emerging Advisers as at 23 September 2018. 8
China – restructuring leading to better utilization Industrial capacity utilization rate (%) 79 78 77 76 75 74 73 72 2013 2014 2015 2016 2017 2018 Source: UBS as at 15 August 2018. 9
Dongfeng Motor (DFM): Chinese auto manufacturer § DFM is a Tier 1 Chinese SOE, majority owned by the Central Earnings per share Government 1.8 1.6 1.4 § DFM owns 50% in joint ventures with Nissan, Honda & 1.2 Peugeot in China, which account for over 90% of DFM’s 1.0 0.8 earnings 0.6 0.4 § In 2017, these JVs sold over 10% of all passenger vehicles 0.2 0.0 sold in China FY FY FY FY FY FY FY FY FY FY FY 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 § DFM also owns 12% of PSA Peugeot group and has a very cash rich balance sheet P/E & Dividend Yield 25 6 § When we combine the stake in PSA Group, net cash at the 20 corporate level and JV level combined, we get a value in 4 15 excess of the market capitalisation of the company. This implies 10 negative value for the stakes in joint ventures 2 5 § Over the last decade, DFM has grown earnings at a 14% 0 0 CAGR. The shares trade on below 4X PE with a dividend yield 07 08 09 10 11 12 13 14 15 16 17 18 in excess of 4% PE ratio, x (LHS) Dividend Yield. % (RHS) Sources: Invesco, Bloomberg as at 12 October 2018. 10
China – restructuring its economy Contribution to Chinese real GDP growth (3qma) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Overall consumption Gross capital formation Source: Emerging Advisors Group as at 30 June 2018. 11
China – the new economy Share price performance of Chinese internet-related companies, normalised to 100 on 1 Jan 2014 500 450 400 350 Tencent 300 NetEase 250 Alibaba Autohome 200 150 JD.com Baidu 100 BitAuto 50 0 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Source: Bloomberg. Weekly data to 7 September 2018. Alibaba, JD.com and Autohome’s performance is normalised to 100 at IPO data (Sept14, May14 and Dec13 respectively). For illustrative purposes only. 12
The investment case for Emerging Markets as an asset class
Facing major Emerging Markets concerns § Trade War – Political rather than economic narrows scope – Don’t overstate importance of impact, or continuity of long term trends – Look for beneficiaries § US monetary policy tightening – Emerging markets better positioned vs recent past with mostly stable macro China Slowdown § – Slower but better growth After recent weakness, we believe: § There is limited optimism priced into the market § We can be comfortable with company earnings prospects § The risk/return balance for Emerging Markets looks attractive 14
Global Emerging Markets credit growth – little sign of excess EM credit growth 30% 25% 20% 15% 10% 5% Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Private credit Total assets Source: Emerging Advisers Group. EM credit growth (mid-weighted, % y/y 3mma) as at 30 June 2018. 15
Global Emerging Markets current accounts – generally solid Current account balance by region 15% 10% 5% 0% -5% -10% Mar 00 Sep 01 Mar 03 Sep 04 Mar 06 Sep 07 Mar 09 Sep 10 Mar 12 Sep 13 Mar 15 Sep 16 Mar 18 Asia CEE Latam ME/Afr Source: Emerging Advisers Group. Current balance (12m cum, % GDP) as at 30 June 2018. 16
Global Emerging Markets – corporate balance sheets in good health Net Debt % Equity 140% 120% 100% 80% 60% 40% 20% 0% Dec 95 Dec 99 Dec 03 Dec 07 Dec 11 Dec 15 EM Europe US JP Source: Worldscope, FactSet, Citi Research as at 16 October 2018. 17
Global Emerging Markets – improving free cash flow generation Oper CF / (Capex+Div) Oper CF / (Capex+Div) 1.90 1.70 1.50 1.30 1.10 0.90 0.70 0.50 Dec 95 Dec 00 Dec 05 Dec 10 Dec 15 US EU JP EM Source: Worldscope, FactSet, Citi Research as at 16 October 2018. 18
Global Emerging Markets – macro overview Relative performance of GEMS turning MSCI Emerging Markets relative to MSCI World 120 100 80 60 40 20 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Datastream as at 1 August 2018. 1 January 1994 = 100. 19
Global Emerging Markets – macro overview Earnings revisions more supportive after years of decline MSCI Emerging Markets index – FY2 earnings revisions (3MMA, %) 20 10 0 -10 -20 -30 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Morgan Stanley as at end July 2018. Earnings Revision Breadth Definition: (Number of up revisions minus number of down revision)/total number of available analysts forecasts. FY2 refers to next year’s earnings, and rolls over each February. 20
Margin evolution and return on equity Revisions well supported by fundamentals Trend in net income margins Trend in ROE (rebased to 100) (rebased to 100) 130 130 120 120 110 110 100 100 90 90 80 80 70 70 60 60 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Emerging Markets US Emerging Markets US Source: MSCI, IBES, Thomson Reuters Datastream, HSBC 12-month forward calculations as at 17 April 2018. LHC: 100 = 18/01/2004. RHC: 100 = 18/01/2004. 21
Global Emerging Markets – macro overview Emerging markets trading at biggest discount to US market in 16 years P/E of MSCI Emerging Markets less P/E of S&P500 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Bloomberg as at 17 July 2018. 22
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