What Is a DM? Javier MSCI Developed Markets Index Estrada IESE - - PDF document

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What Is a DM? Javier MSCI Developed Markets Index Estrada IESE - - PDF document

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Emerging Markets (I): Performance Javier Estrada ADFIN Winter/2014 1. Introduction Developed, emerging, and frontier markets 2. Equity and Debt Markets Return, risk, and performance Diversification and allocation 3. Perspectives

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  • 1. Introduction
  • Developed, emerging, and frontier markets
  • 2. Equity and Debt Markets
  • Return, risk, and performance
  • Diversification and allocation
  • 3. Perspectives (Valuation)
  • P/E, CAPE, and D/P

Emerging Markets (I):

Performance

Javier Estrada ADFIN – Winter/2014

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

What Is a DM?

Australia Hong Kong Portugal Austria Ireland Singapore Belgium Israel Spain Canada Italy Sweden Denmark Japan Switzerland Finland Netherlands UK France New Zealand USA Germany Norway

MSCI Developed Markets Index

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

What Is an EM?

Asia (8)

China India Indonesia Korea Malaysia Pakistan Philippines Sri Lanka Taiwan Thailand

EMEA (8)

Czech Rep. Egypt Greece Hungary Israel Jordan Morocco Poland Russia South Africa Turkey

LatAm (5)

Argentina Brazil Chile Colombia Mexico Peru Venezuela

MSCI Emerging Markets Index (EMI)

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

What Is an FM?

Argentina Kuwait Romania Bahrain Lebanon Serbia Bangladesh Lithuania Slovenia Bulgaria Mauritius Sri Lanka Croatia Morocco Tunisia Estonia Nigeria Ukraine Jordan Oman UAE Kazakhstan Pakistan Vietnam Kenya Qatar

MSCI Frontiers Markets Index

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

What is an FM?

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMs in Perspective EMs are …

70% of the world’s population 45% of the world’s land mass 30‐35% of the world’s GDP 10‐15% of the world’s equity market cap

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Weights by Country

CHN‐KOR‐TAI: 48% CHN ‐ … ‐ SAF: 66%

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Weights by Region

Asia 63% LatAm 19% 18% EMEA

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

2013 Returns

EMI: –2.3% Avg: –4.2% WOR: 23.4%

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

2013 and Beyond

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

2013 and Beyond

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Mean Returns (GM)

EMI: 12.1% Avg: 11.1% WOR: 8.0%

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Total Risk (SD)

EMI: 23.6% Avg: 36.9% WOR: 15.4% Over 1/3 decrease

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Systematic Risk (Beta, wrt World)

EMI: 1.17 Avg: 1.17

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Performance

Avg: 17.6%

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Performance

2% 391% 545% $100  $1,956 (GM: 12.1%)

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Regional Performance

EMI: $1,956 (12.1%) LatAm: $7,279 (17.9%) Europe: $915 (8.9%) Asia: $774 (8.2%)

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Relative – USA

EMI: $1,956 (12.1%) USA: $1,382 (10.6%)

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Relative – EUR

EMI: $1,956 (12.1%) EUR: $1,045 (9.4%)

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Relative – WOR

EMI: $1,956 (12.1%) WOR: $733 (8.0%)

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Relative – Last 10 Years

EMI: $298 (11.5%) EUR: $214 (7.9%) WOR: $210 (7.7%) USA: $207 (GM: 7.6%)

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMI – Relative – Last 5 Years

USA: $231 (18.2%) EMI: $202 (15.1%) WOR: $206 (15.5%) EUR: $193 (14.1%)

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Diversification Benefits (2004‐13)

CHN SPA

39.0% 11.9% 28.1% 19.6%

Correlation = 0.60

(28.1% , 13.9%)

Annual Diversification Gain = 2.0%

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Optimal Diversification (1993‐2012)

Highest RAR: 87% DMs , 13% EMs

Correlation = 0.70

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Diversification & Asset Allocation

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Diversification & Asset Allocation

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Diversification & Asset Allocation

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EM Debt

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMBI – Performance

Avg: 10.9%

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMBI – Performance

$100  $652 (GM: 9.8%) SD: 13.9%

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EMBI – Spreads

Avg: 452 1136 (Aug/98) 315 156 (May/07)

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EM Ratings (Jan/2014)

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

EM Ratings

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Growth & Returns

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Valuation – P/E

Jan/1/14: 12.1 Avg (1995‐2013): 13.4

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Valuation – CAPE

Jan/1/14: 13.3 Avg (1995‐2013): 15.9

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Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Valuation – D/P

Jan/1/14: 3.0% Avg (1995‐2013): 2.3%

Javier Estrada IESE Business School Barcelona Spain ADFIN Winter/2014

Valuation – RDM – Next 10 Years

1995‐2013

Growth earnings 8.5% Average P/E 13.5

Jan/1/14

D/P 3.0% P/E 12.1 Growth earnings 8.5% ΔP/E (MR) 1.1% ΔP/E (RW) 0.0% Assumptions

R1  3.0%+8.5%+1.1% = 12.6% R1  3.0%+8.5%+0.0% = 11.5%

Historical (1988‐2013): 12.1%