Emerging Markets Radar (March 12, 2012)

Sunday, March 11th, 2012

Emerging Markets Radar (March 12, 2012)

Strengths

• The Global Emerging Markets Fund (GEMFX) has benefited from a bias toward small-caps in 2012. On a relative basis, the fund has benefited from choosing stocks that pay more than twice the dividend yield of the Russell 2000 Index and those companies which have a low price-to-earnings ratio.
• China’s February Consumer Price Index (CPI) was up 3.2 percent in February, lower than the estimate of 3.5 percent and below January’s 4.5 percent figure. With inflation expectations tamed, the market expects the People’s Bank of China (PBOC) to further cut the reserve requirement ratio (RRR).
• China’s fixed asset investment (FAI) growth came in stronger than expected at 21.5 percent year-over-year during the first two months of 2012, up from 18 percent in December. Interestingly, residential FAI rose 27 percent, the same pace as last year. This indicates that the housing market may not collapse as many worried last year.
• New bank deposits rebounded strongly in February to Rmb 1.6 trillion, enabling Chinese banks to lend more in March. In addition, M2 money supply growth was near expectations, right at 13 percent.
• Philippine CPI rose 2 percent in February. This is well below the 3.2 percent increase that was forecasted.

Weaknesses

• China’s retail sales and industrial production growth came in weaker than expected. Retail sales rose 14.7 percent, down from 17.1 percent in 2011. Industrial production rose 11.4 percent, slowing by 1.4 percentage points from December. These data points indicate that China had probably over tightened its monetary and industrial policies and needs to loosen up these policies during the first half of the year.
• China has lowered the country’s GDP growth target to 7.5 percent this year, 50 basis points lower than in the past eight years. Many believe Chinese policymakers will try to slow down the country’s economic growth by curbing housing market growth and postponing some infrastructure growth. However, China has consistently beaten its own GDP target every year over the last decade and the country will still encourage growth in consumption and industrial enhancement.
• Malaysia’s exports grew 0.4 percent in January, the slowest pace in 15 months.
• After a good run, Turkish industrial production faltered in January. Industrial production was up by 1.5 percent year-over-year in January, weaker than the market expectations. Turkey’s Purchasing Manager’s Index (PMI) also deteriorated in February as a result of poor weather conditions.

Opportunities

• Droughts from Mexico to Argentina are shrinking corn stockpiles to a five-year low. This raises the prospect of a bull market in the U.S., as farmers are expecting to see the biggest crop ever.
• Corn demand in China, the biggest consumer after the U.S., may decline after Premier Wen Jiabao lowered the annual growth target to 7.5 percent. Prices fell 16 percent in the last four months of 2011 as the U.S. Department of Agriculture (USDA) predicted Brazil and Argentina would produce their biggest crops ever. The two countries currently account for almost 10 percent of global corn supply. While prices may keep rising for now, analysts anticipate declines by the end of the year as U.S. growers harvest the most acres planted since 1944.
• This chart shows China’s inflation has come down notably since July 2011. Food prices, the largest contributor to the rise in inflation last year, have come down since the fourth quarter after the supply chain and logistics were improved. The market expects the PBOC to cut RRR again in order to support economic growth and liquidity in the economy.

Threats

• While investment flows pour into most of the largest emerging markets, foreign investors are selling South African equities at the fastest pace in four years over growing concern that policy makers will seek a larger share of the nation’s mining profits. International investors sold $933 million of South African equities in the first two months of this year and are on track for the biggest first-quarter outflow since 2008.
• A study commissioned by President Jacob Zuma’s ruling African National Congress party proposed increasing taxes on the mining industry last month. In addition, the party’s youth wing has lobbied for a government takeover of gold and platinum mines to boost employment in Africa’s biggest economy.
• China’s February retail sales rose 14.7 percent, below the expectations of policymakers. In order to reach the stated consumption growth target near or above 18 percent, Chinese policymakers need to loosen the country’s monetary policy or begin a fiscal subsidy, such as a new home appliance incentive.

Tags: Agriculture, Asset Investment, Bank Deposits, Bank Of China, Chinese Banks, Consumer Price Index, Dividend Yield, emerging markets fund, GDP Growth, Gemfx, Growth Target, Index Cpi, Industrial Policies, Inflation Expectations, Infras, Money Supply Growth, Pboc, Price To Earnings Ratio, Relative Basis, Russell 2000 Index, Small Caps
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Mark Mobius: Extensive Interview, Outlook, Perspective on Emerging Markets (Bloomberg)

Friday, September 9th, 2011

MARK MOBIUS, EXECUTIVE CHAIRMAN, TEMPLETON ASSET MANAGEMENT, IS INTERVIEWED AT BLOOMBERG TV

AUGUST 29, 2011

SPEAKERS: Mark Mobius, Executive Chairman, Templeton Asset Management

MARK MOBIUS, EXECUTIVE CHAIRMAN, TEMPLETON ASSET MANAGEMENT: Isn’t it wonderful? The markets are down. That’s the time I’m very, very happy. Unfortunately a lot of our clients are not too happy.

And I remember during the last downturn during the Asian crisis I was in Edinburgh, Scotland. And you know the Scottish don’t like to lose money. And this gentleman called in. By the way my name is pronounced Mobius and this gentleman called in. Apparently he was a holder of our emerging markets fund. He said, “Now, about this emerging markets fund, I’d like to talk to Dr. Dubious.” So we have to be very [hard].

What I’d like to do today in twenty minutes because we’ll leave enough time for questions, which is the most interesting part of these events, I want to give you a quick outlook on where we are within the canvas . And of course the first thing is performance. How is the emerging markets’ performance?

And if we look at the ten-year performance we see that emerging markets have outperformed the world and the US market by a very, very wide margin. If you look at the five-year performance, again, emerging markets have outperformed by a very wide margin. If we look at the 2010 performance, again, emerging markets have outperformed by a wide margin, but if you look at the recent since January, actually emerging markets have underperformed.

And I know a lot of people thought they had [sales], not it’s finished for emerging markets. No, it’s not over. Why? If you look at history the last ten years emerging markets outperformed full years of these nine out of ten. This year I don’t know what’s going to happen by the end of the year, but it’s not surprising that it might outperforming, but I think it will probably surge up again and outperform.

So what I’d like to do is give you the reasons why we feel that the markets are behaving in the way they are. In order to understand the markets you’ve got to understand supply and demand. It’s a marketplace.

If there’s too much supply the market’s not going to do very well. If there’s too much demand the market is going to be doing very well because the prices will move up, but what happens is when the markets go up you see a lot of new supply coming in.

And if you look at the supply numbers for emerging markets since 2000 you see that back then emerging market IPOs and follow-on issues represent about ten percent of the global IPO and follow-on issues area. Now in 2010 it went up to 50 percent of the total. So we’ve seen a lot of new issues coming in.

This gives the numbers. Of course that blue line is the index, and of course when the index goes up in ’07 we had a very bullish market. The number of IPOs went up to roughly $370 million, $380 million – billion dollars. And last year we saw over $460 billion in IPOs, so obviously lots of supply and that tends to have a depressing effect on the market, which by the way I think is great because otherwise we would have had a bubble.

If we look at where the IPOs are coming from you’ll see that China has grown dramatically compared to the US. Back in ’08 China represented maybe about one fifth of the US IPO market. Now in 2010 they surpassed the US.

If we look at emerging markets, emerging markets after years of being under the US now is far, far greater than the US, and of course the US the largest market in the world. So we’re seeing a lot of supply coming in from emerging markets.

Okay. How about demand? Where’s demand coming from? If we look at the total market capitalization of emerging markets, and by the way market capitalization is calculated by multiplying the number of shares outstanding in all these markets by the price. Of course when prices go up the market capitalization goes up. And if the number of shares goes up market capitalization goes up as well.

If both go up then we really have a big increase, but you can see that since 1998 when the percent of emerging markets was eight, anywhere between three to eight percent, we’re now up to 34 percent. So when people ask me what percent should I have in my portfolio in emerging markets I tell them that would be 34 percent because that’s the market. That’s the percent that it is in the global market, but most people have between three to eight percent in emerging markets, that yellow bar. Unfortunately they don’t list them at the bottom. They don’t buy at the bottom.

My sister-in-law when there was big boom before the Asian crisis in emerging markets went into our emerging markets fund. The next year when the market tanked I had to visit my brother in Buffalo, New York. And I remember knocking on the door. I heard her voice behind the door. “Who’s there?” I said, “I said it’s Mark.” “I’m not opening the door and give me my money back.” I said, “If you’ll open the door I’ll tell how to get your money back.” She opened it up and left the chain on the door. She said, “How?” I said, “Buy more.” She slammed the door in my face.

This is the situation where you have in these markets very, very few people have 34 percent in their portfolio in emerging market stocks. And I’ll tell you there are a lot of reasons why it should be more. And it’s happening because you can see the net inward close into emerging market funds like our own growing very rapidly, as you can see from this chart.

What are the fundamentals? Why do we think that people should be in these markets? Well, first of all it’s all about growth. Emerging markets this year will be growing three times faster than the developed countries, US, Japan, Western Europe, three times faster, even the most pessimistic forecasts.

By the way, I decided to downgrade our China forecast and then I looked at the consensus, the recent consensus is up. It’s not down. If you look at China and India this year the consensus is that China will grow by nine percent. India will grow by almost eight percent compared to 1.7 for the US and a minus number for Japan.

So the growth is there. There’s no question about it. The next years, and by the way, another thing I think we have to get straightened out is some people who have been saying because some people I cannot fathom. There’s no relationship between the stock market and economic growth. I don’t know where they get this, but I think I’ve figured it out because they’ve done correlation analysis.

They say, okay, let me take January to December and correlate the stock market with the economic growth. And it’s a negative number. They don’t correlate. Why? Because the stock market is a leading indicator. It moves up before the economy moves up, so of course there’s no correlation. It doesn’t mean there’s no causation. The causation is definitely there. There’s a strong relationship between economic growth and the health of the stock market because companies depend on economic growth.

Tags: Asian Crisis, Bloomberg Tv, Brazil, Canvas, Commodities, Crude Oil, Downturn, Edinburgh Scotland, emerging markets fund, Executive Chairman, Gentleman, Gold, India, Last Ten Years, Mark Mobius, Money, Outlook, Perspective, Speakers, Templeton Asset Management, Twenty Minutes, Wide Margin
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Emerging Markets Cheat Sheet (August 29, 2011)

Saturday, August 27th, 2011

Emerging Markets Cheat Sheet (August 29, 2011)

Strengths

• Overall, the Global Emerging Markets Fund performed well considering the worldwide uncertainty and negative sentiment among the global sovereign debt issues. The fund’s exposure to the information technology, telecom and energy sectors continued to produce positive gains, coupled with the fund’s weighting in Peruvian, Chinese and Polish stocks, which contributed positively to the fund.
• Chile, the world’s biggest copper producer, is poised to shrug off a global economic slowdown and generate growth of more than 5 percent next year.
• Standard & Poor’s upgraded the Czech Republic’s credit rating by two notches to AA in late August, citing the government’s commitment to its fiscal consolidation program and the prudently managed and balanced economy. The upgrade came on the heels of the parliament committee’s decision to green-light a pension overhaul plan, according to RGE Monitor.
• Many Chinese companies have reported sales and earnings exceeding analysts’ expectations for the first half of the year. Particularly, banks and consumer goods and services are seeing growth in sales and resilient earnings momentum, in spite of the fact that China retains the policy of monetary tightening. Industrial and Commerce Bank of China (ICBC) reported net interest margin expansion of 4 basis points to 2.62 percent on 24 percent growth year-over-year in loans to small business, and steady demand deposits. Meanwhile, asset quality has improved and Local Government Financing Vehicle loans with cash flow coverage of less than 70 percent declined 74 percent half-over-half, bumping up the tier-1 capital adequacy rate by 16 basis points quarter-over-quarter to 9.82 percent. Belle International, a women’s shoes retailer, reported first half net earnings up 25 percent.
• The People’s Bank of China (PBOC) didn’t raise interest rates over the weekend as the market had expected, confirming that China may slow tightening when the global economy is in difficulty.

Weaknesses

• Unfortunately, the fund was negatively affected due to exposure in Thailand, India and the healthcare sector, all of which were in the bottom half of performers for the week.
• BBC News reported that Chile witnessed two days of nationwide work stoppages and street protests amid ongoing student protests to press for education reform. The unions’ demands included changes to pensions, health care and taxes, as well as constitutional reform. Violent clashes erupted after some demonstrators erected burning barricades and threw stones. Over 300 people were arrested, there was one fatality and dozens were injured.
• UBS AG, Switzerland’s largest bank, announced that 3,500 jobs, or 5.3 percent of the workforce, would be eliminated. UBS is among many of the international banks which have announced reductions in the past two months, contributing to the 60,000 job reductions this year through the first week of August.
• At $9.0 billion, the trade gap in Turkey came in narrower in July than the consensus. Trade figures showed nascent signs of improvement as export growth of 6.3 percent surpassed import growth of 1.6 percent.
• PBOC had just confirmed after market close on Friday that a new required reserve ratio (RRR) rule will be implemented in September, which will require margin deposits from acceptance, guarantee, and letter of credit to be included in the calculation of RRR. The overall impact would be Rmb 0.7 to 0.8 trillion, according to CICC. This will be another overhang for bank stock prices in the short-term.

Opportunities

• The Financial Times highlighted that there are a growing number of Brazilians with international expertise and experience who are returning to Brazil. They are helping Latin America’s largest economy deal with a shortage of managerial talent as it becomes evermore entwined in the global economy, particularly after China overtook the U.S. as its biggest trading partner in 2009. Popular sectors include banking and engineering, and the shortage of managerial talent is reflected in soaring salaries. A study by Dasein Executive Search last December found that company bosses in Sao Paulo were the world’s highest paid, with a chief executive in Brazil’s financial capital earning an average of $620,000 excluding bonuses, compared with $574,000 in New York and $550,000 in London.
• According to Bloomberg, Mexico may receive as much as $20 billion in foreign direct investment this year, 11 percent more than a prior forecast, as the second-largest Latin American economy’s low wages and proximity to the U.S. draw producers. Mexico has manufacturing costs 25 percent lower than the U.S., is producing more engineers than other countries and is signing free trade pacts with nations like Colombia, Economy Minister Bruno Ferrari said.

• China’s cement H-shares price has corrected 30 percent on average since mid-July, showing attractive valuation. Aside from broad market fears for a possible global recession, the cement price decline in July and August was to blame for the sell-off. According to CICC research, the cement price is seasonally weak in July and August, but the fourth quarter is the high season. This chart shows the supply driver for the cement price is reduced capacity in the sector, after the Chinese government ordered consolidation by closing down inefficient and environmentally harmful factories.
• Amid a decline in brownfield production in West Siberia and elsewhere in Russia, greenfield production is becoming more important. The next big hope for Russian oil is in East Siberia, with output to account for 80 percent of growth and 15 percent of total output by 2018, according to Merrill Lynch estimates.

Threats

• Bloomberg reported that the cost of protecting Argentinean debt against default is rising faster than in any country except Greece as President Cristina Fernandez de Kirchner’s landslide win in a primary vote bolsters her re-election bid, reducing the chance of policy changes needed to sustain growth. Since taking office in 2007, Fernandez has seized $24 billion of private pensions, called for limits on foreigners buying land and fined researchers who say inflation is 23 percent, more than double the official rate.
• There is speculation that Mexico’s central bank will hold its benchmark interest rate at a record low as Europe’s debt crisis and the prospect of a U.S. recession restrain economic growth and inflation. Signs of economic weakness in the U.S., which buys about 80 percent of Mexico’s exports, have prompted JP Morgan Chase & Co. and Financiero Banorte SAB to cut their Mexican economic growth forecasts.
• Russian news wires reported that the government agreed on the new tax regime for the oil industry, to be introduced October 1. The unintended outcome of this proposal, according to VTB Capital, is that the entire refining segment could become loss-making in a sub-$80 per barrel of crude pricing environment.
• The expectation for August inflation in China has been that it will show an inflection point before turning downward in the fourth quarter. However, the price of pork has moved up again after weakening in the first two weeks. If inflation is at the same level as July, or higher, the PBOC may have to raise interest rates, though such action is not generally expected by the market.

Tags: Asset Quality, Bank Of China, Brazil, Capital Adequacy, Chinese Companies, Consolidation Program, Copper Producer, Crude Oil, Debt Issues, Demand Deposits, Earnings Momentum, emerging markets fund, Energy Sectors, Fiscal Consolidation, Global Economic Slowdown, India, Interest Margin, Local Government Financing, Negative Sentiment, Parliament Committee, Pboc, Tier 1 Capital, Vehicle Loans
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Patricia Perez-Coutts, manager of 2010 Best Emerging Markets Equity Fund (CIA)

Thursday, December 16th, 2010

Patricia Perez-Coutts, CFA – Senior Vice-President and Portfolio Manager discusses the emerging markets opportunity.

Patricia manages the AGF Emerging Markets Fund which in December was named the 2010 Best Emerging Markets Equity Fund by the Canadian Investment Awards.

Source: Clientinsights.ca

Tags: Agf Funds, Canadian Investment Awards, Canadian Market, Emerging Markets, emerging markets equity fund, emerging markets fund, Flv Player, patricia perez, Portfolio Manager, Senior Vice President, True Loop
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