The Emerging Markets Opportunity Society of Pension Professionals - - PowerPoint PPT Presentation

The Emerging Markets Opportunity

The Emerging Markets Opportunity

Society of Pension Professionals Society of Pension Professionals 6th November 2014 Julian Mayo Co-Chief Investment Officer Charlemagne Capital (UK) Limited

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The Emerging Markets Opportunity

Emerging Markets

• Reforms
• Stable growth

Stable growth

• Discounted valuations
• Market focus should revert to quality

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Oppo Opportunities rtunities

The Emerging Markets Opportunity

Emerging Markets

Reforms in key economies % of EM

• China – SOEs; household registration; RMB; one child policy

20% China SOEs; household registration; RMB; one child policy 20%

• India – focus on exports; infrastructure; urbanisation; finance

7%

• Indonesia – fuel subsidy elimination; infrastructure

3% Mexico energy; telecoms 5%

• Mexico – energy; telecoms

5%

• Brazil – where do we start?!

11% 46%

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Significant progress Significant progress

The Emerging Markets Opportunity

Structural Reforms

Most countries are improving

30 40 50

Citi's Structural Reforms Index

Better 10 20 30 ‐20 ‐10 Worse ‐40 ‐30 Mexico India China Malaysia lippines Taiwan donesia Korea

• lombia

Turkey Nigeria Poland Brazil Panama Peru Thailand Egypt Chile h Africa Russia rgentina Hungary M Phi Ind Co P T Sout Ar H

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They are really happening They are really happening

Source: Haver, Citi Research

The Emerging Markets Opportunity

Emerging Markets Growth

vs Developed Markets

8 10

Gross domestic product, constant prices

4 6 % 2 ‐4 ‐2 2007 2008 2009 2010 2011 2012 2013 2014 2015E Advanced economies Emerging market and developing economies

Growth premium no Growth premium no longer contracting longer contracting

Source: IMF Research

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The Emerging Markets Opportunity

Emerging Economies

Economic surprise indices in EM not that dissimilar to DM

60 80

Citi Economic Surprise Index

20 40 ‐40 ‐20 ‐80 ‐60 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 G10 EM

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EM tracking DM EM tracking DM

Source: Bloomberg, Citi Research

The Emerging Markets Opportunity

Current Accounts

Clear improvement in India and Turkey

0%

Current Acct. % GDP, Current vs 2013Q2

‐4% ‐2% ‐8% ‐6% ‐12% ‐10% India Indonesia Brazil South Africa Turkey 2013Q2 2014Q2

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Not so Not so fragile fragile

Source: Haver, Citi Research

The Emerging Markets Opportunity

Remember Why We Are In This Mess

Emerging Markets debt still very low

300% 350% Total Debt as % of GDP (Non Financial Private Sector + Govt ) 242% 246% 258% 274% 276% 278% 282% 284% 250% 300% 113% 116% 119% 134% 142% 142% 150% 158% 150% 200% 50% 100% 2006 2007 2008 2009 2010 2011 2012 2013 DM EM

The debt The debt is in the West is in the West

Source: BIS, IMF, Haver Analytics, Morgan Stanley Research. DM = US, EA, UK, JPN EM = CHN, IND, KOR, IDN, MAL, THL, BRA, MEX, RUS, POL, CZE, HUN, TUR, IST, SAF

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The Emerging Markets Opportunity

PE Ratios

On reported PE, GEMs are trading at 1 standard deviation below mean

35 40 PE (x) 25 30 35 15 20 16x 13x 5 10 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Global Emerging Markets

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Cheap by Cheap by historic standards historic standards

Source: MSCI, Citi Research

The Emerging Markets Opportunity

Emerging Markets

PER relative to developed markets

1.1 12M fwd PE of EM relative to DM 0.9 1.0

• Avg. + 2 Stdev.

0.8 Average

• Avg. ‐ 2 Stdev.

0.6 0.7 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014

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Near crisis lows Near crisis lows

Source: MSCI, IBES, Thomson Reuters DataStream, HSBC

The Emerging Markets Opportunity

Emerging Markets

12 month forward operating margins

24% 25%

12M‐forward operating margins for EM and DM

20% 21% 22% 23% 17% 18% 19% 20% 15% 16% 2006 2007 2008 2009 2010 2011 2012 2013 2014 EM DM EM DM

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Profitability remains higher Profitability remains higher

Source: MSCI, IBES, Thomson Reuters DataStream, HSBC

The Emerging Markets Opportunity

Emerging Markets

Relative earnings revisions for current and following years

10 15

Relative Earnings Revisions Ratio of Basket, 3mma %

5 15 ‐10 ‐5 ‐20 ‐15 2008 2009 2010 2011 2012 2013 2014 FY1 FY2 FY1 FY2

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Realistic expectations at last? Realistic expectations at last?

Source: Charlemagne Capital

The Emerging Markets Opportunity

EM Earnings

DM revisions vs EM: at the same level

40 50

Earnings Revision Index EM vs DM

20 30 ‐10 10 ‐30 ‐20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 3 per. Mov. Avg. (EM rel. DM)

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EM earnings expectations realistic EM earnings expectations realistic

Source: IBES Aggregate, Citi Research

The Emerging Markets Opportunity

Equity vs Debt

EM debt markets stable relative to DM, even as EM equities underperform

1.1 200

GEMs Bond Spread vs Equity Spread

0.9 1.0 300 400 0.7 0.8 500 600 0.5 0.6 700 800 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 EMBI Global Comp Spread, inverted (LHS) MSCI EM/US Price (RHS)

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EM equities relatively undervalued EM equities relatively undervalued

Source: Haver, MSCI, Datastream, Citi Research

The Emerging Markets Opportunity

Emerging Markets

Investing in Equity and Income

• Seeking attractive returns from quality companies with a dividend culture
• Low volatility exposure
• Capital growth and income
• Opportunities across all regions, sectors and market caps

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Attractive investment oppo Attractive investment opportunity rtunity

The Emerging Markets Opportunity

Appendix

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The Emerging Markets Opportunity

FX Reserves to Imports

EMs less vulnerable to FX fluctuations than in ’90s

1.4 1.6

Import Coverage Ratio

FX reserves to Import 0 8 1.0 1.2 0.4 0.6 0.8 0.0 0.2 1989 1992 1995 1998 2001 2004 2007 2010 2013 AxJ LatAm EMEA

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Less risk from FX Less risk from FX

Source: CEIC, Haver, IMF, FactSet, Citi Research

The Emerging Markets Opportunity

Public Debt Levels

EM public debt compared to DM

110 120

EM vs DM public debt to GDP

Public Debt as % of GDP 70 80 90 100 40 50 60 70 20 30 40 1983 1988 1993 1998 2003 2008 DM EM

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EM look far healthier EM look far healthier

Source: CEIC, Haver, IMF, Citi Research

The Emerging Markets Opportunity

Demographics

EM better off than DM

68% 70%

% of Working Population (aged 15‐64)

64% 66% 60% 62% 56% 58% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 DM EM

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There’s China, but there’s also India There’s China, but there’s also India

Source: Haver, United Nations, Citi Research

The Emerging Markets Opportunity

Spot The Difference?

Korea 1 200 1,400 kg)

Steel Consumption Per Capita

Taiwan 800 1,000 1,200 tion Per Capita (k China Japan US 2013E 2014E 400 600 Steel Consumpt India 200 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 GDP C it (PPP 2012 C t t D ll ) GDP per Capita (PPP, 2012 Constant Dollar)

No, I thought not! No, I thought not!

Source: WorldSteel, Conference Board, IMF, Morgan Stanley Research

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The Emerging Markets Opportunity

Earnings Growth

EPS trends

110 120

Regional EPS since their 2007/08 peaks

90 100 60 70 80 40 50 ‐12 12 24 36 48 60 72 Peak time = 0 GEMS 7/2008 AC World 2/2008

EM earnings outperform DM since prior peak EM earnings outperform DM since prior peak

Source: MSCI, Citi Research

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The Emerging Markets Opportunity

EM PE Ratios Relative To Developed

EM discount has widened

35 40

EMs PE relative to Global

PE(x) 25 30 35 15 20 5 10 1994 1998 2002 2006 2010 2014 AC World GEMS

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EM valuations near long term lows EM valuations near long term lows

Source: Haver, MSCI, Citi Research

The Emerging Markets Opportunity

Emerging Markets

ROE and PB ratio

2% 4% 20% 40% ‐2% 0% ‐20% 0% 6% ‐4% 60% ‐40% ‐8% ‐6% ‐80% ‐60% 1988 1991 1994 1997 2000 2003 2006 2009 2012 EM PBV Discount to World (LHS) EM ROE rel. to World (RHS)

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Ems cheaper with Ems cheaper with higher ROE higher ROE

Source: EPFR Global, MSCI, Citi Research

The Emerging Markets Opportunity

Disparate Opportunity Set

ROIC v Capex/Payout ratio

14% 16% ROIC

Cross Section comparison of ROIC vs Capex to Payout ratio

EMEA IN ID RU TR US 10% 12% 14% EMAsia LATAM CN MY PH KR TW TH MX ZA PL US EU 6% 8% LATAM BR JP 2% 4% 0.8 2.8 4.8 6.8 8.8 10.8 12.8 0.8 2.8 4.8 6.8 8.8 10.8 12.8 Capex / Payout

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Korea stands out for the wrong reasons Korea stands out for the wrong reasons

Note: The payout here includes both dividend and shares buyback Source: Worldscope, FactSet, Citi Research

The Emerging Markets Opportunity

Disclaimer

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