Mirae Asset Global Investments Releases "Emerging Markets Outlook 2012"
Emerging Markets Experts See Positive Money Flows, Attractive Valuations and Resilient Economic Growth in Developing Economies
December 12, 2011
In a report issued today, senior investment professionals from emerging markets leader Mirae Asset Global Investments announced that they believe developing economies will continue to have robust growth potential and that inflationary pressures have abated in the face of a slowdown in global growth. In 2012, they also believe that the flow of assets to emerging nations has the potential to resume as equity valuations remain attractive across the emerging markets, relative to their developed market counterparts.
Assembled from contributions by numerous senior investment professionals in Hong Kong, São Paulo, Seoul and New York, "Emerging Markets Outlook 2012" provides a 24-page overview of Mirae Asset's latest insight on the opportunities and risks in emerging markets equity investing for the coming year.
A summary of Mirae Asset Global Investments' 2012 outlook for the emerging markets, as well as snapshots of individual markets and regions, including China, India, ASEAN, Korea, Latin America and Russia/EMEA (including the Czech Republic, Turkey and South Africa), appears in the excerpts below. The report also contains portfolio strategies for taking advantage of investment opportunities. The portfolio managers who contributed to the report are listed at the end of this release.
Outlook: Broad Emerging Markets
Economic growth in emerging markets will likely outshine the rest of the world in 2012, given the weak growth prospects beleaguered developed nations currently are facing (pg 5). In anticipation of weaker demand and slower growth from developed markets, central banks in emerging market economies have begun to loosen monetary policy. We expect this trend to continue into the first half of 2012, as the global macro environment remains unclear (pg 1 summary).
Equity valuations look attractive across the emerging markets, as price-to-earnings and price-to-book value ratios remain below historic long-term averages. The markets are expected to refocus and return to trading on fundamentals as volatility abates. As market volatility subsides from August 2011 peaks, emerging market fund flows globally have begun to reverse course and trend positive. We anticipate modest inflows to emerging market funds, once the developed market turmoil is contained and investor risk appetite returns to pre-crisis levels. (pg 7).
China is going through a period of economic transition. While growth in GDP is expected to be lower than it had been in previous periods, volatility should lessen as domestic demand increases and certain industries upgrade themselves. As a result, investors' fears about a hard landing should gradually ease. Our cross-country analysis indicates that a slowdown of GDP growth does not necessarily translate into lower stock market returns. The stock market is just more sensitive to a sharp economic slump. (pg 8).
We are not concerned about a nationwide property bubble, as the current home price-to-income multiple is about 6.4x. Although the multiple is higher in the big cities, we believe it reflects a supply shortage.
Portfolio Strategy: We think sectors likely to do well in 2012 include branded consumer goods, information technology, green energy, as well as service sectors such as tourism, entertainment, healthcare and education. In addition, if we see positive policy movements in 2012, we will look for cyclical opportunities in policy-sensitive sectors such as financials and cyclical industries (pg 10).
Despite robust growth in revenues, corporate earnings have been under pressure because of higher raw material prices and the interest rate burden. We believe that revenue growth may slow down, although declining raw material costs and interest rates will likely act as positive catalysts in 2012. We believe that the Reserve Bank of India (RBI) is likely done for the time being with rate hikes. Inflation is expected to come down from the current 9.5% to about 7% by February 2012.
We estimate a GDP growth rate in India of around 7% to 7.5% for fiscal year 2012 (March-end) and around 7% for fiscal year 2013. Although these growth rates are lower than in previous years, they would make India the second-fastest-growing economy in the world after China, with a GDP of at least $1 trillion. (pg 11).
Portfolio Strategy: We like companies that are good rural economy plays (such as tractors, two-wheelers, fertilizers and agrochemicals) and we are likely to increase our exposure to financials into the first half of 2012. We are neutral on the IT sector and we remain underweight oil and gas. (pg 12).
Outlook: ASEAN (Association of Southeast Asian Nations)
Following a strong performance in 2010 and 2011, we believe that ASEAN markets will take a breather and that GDP growth rates will moderate. The slowdown will be less severe than in previous downtrends, however, as a result of increased dependence on China and India. Despite the near-term slowdown in GDP growth, the long-term story for the region remains intact. The potential for growing demand from a population of 500 million people is a strong point for the region.
Other positive indicators include stable, forward-looking policy regimes, a low debt-to-GDP ratio, fiscal deficits and current account surpluses. The region is also likely to benefit from the export of commodities (pg 13) and an influx of manufacturing work from China and Japan (pg 14).
Portfolio Strategy: We favor Indonesia, Thailand and the Philippines over Singapore and Malaysia. Key sectors in Indonesia include financials, as well as consumer discretionary and media, while in Thailand, the secular demand story favors hospitals and retailers. Our exposure to cyclical stocks comes partially from oil rig builders in Singapore and coal companies in Indonesia. (pg 14).
Korea's economy has maintained resilience following double-digit export growth in 2011, which was possible as dwindling developed markets' demand was largely offset by that of emerging markets. With 2011 year-over-year GDP growth forecasted at 3.8%, we are expecting a modest growth slowdown in 2012, as uncertain global conditions may adversely impact exports and domestic consumption. (pg 17)
A key concern regarding exports is a possible slowdown in demand in emerging market countries due to conditions in the developed markets. For example, if China's exports to developed markets slow, this in turn may reduce overall demand from Asian emerging markets, hurting Korean exports. However, considering China's economic transition to a consumption-led economy, export growth may not be as great as 2011 and we expect the aforementioned adverse impact to be limited. (pg.17)
Portfolio Strategy: We believe the KOSPI market is at attractive valuation levels. In 2012, three main factors are expected to influence the Korean stock market, in our view: (1) developments of the European debt crisis and its impact on the global real economy; (2) recovery of US employment and housing market; and (3) easing monetary policy in China.
The report has detailed investment strategies for companies/sectors with the competitiveness to generate earnings growth. (pg. 17)
Outlook: Latin America
After giving back a small part of the huge outperformance delivered over the past decade in 2011, we anticipate that Latin American markets will once again focus on local fundamentals in 2012. Starting from a base case of decelerating inflation across Latin America, we see room for expansion of multiples across the region's equity markets over the coming 18 months.
Due partly to the composition of local equity markets, Latin America has tended to exhibit above-average volatility in times of global financial stress. Domestic sectors remain under-represented in the local equity indices, except for Mexico. A review of inflation, political risk and analyses of market composition is included in the report. (pg. 18)
Portfolio Strategy: The MSCI Latin America Index sits some 30% below its 2008 peak. Although the pace of 12-month earnings growth has slowed from double to single digits, the region's public, corporate, banking and household sectors show comfortable levels of leverage. As a result, we retain a favorable stance on the long-term investment potential for the region's key markets, including Brazil, Mexico, Chile and Colombia. (pg.20)
Outlook: EMEA and Russia
Russia has fared better in the current market turmoil than in the 2008 crisis. Corporate debt levels are more manageable with longer duration and a lower proportion of foreign currency loans. The central bank has allowed the ruble to float more freely and thus has avoided an attack on the currency. Inflation also remains under control. While Russia remains highly exposed to volatility in global growth and commodity prices, economic growth in Russia can remain positive in 2012 barring a global recession and collapse of energy prices. The political uncertainty that had been weighing on the market has been lifted with Putin announcing his candidacy for the Presidency. (pg. 21)
Portfolio Strategy: While Russia lacks the favorable demographic profile present in other emerging markets, our portfolios aim to capitalize on the increasing formalization and sophistication of the modern retail sectors, and the increasing expenditures of the underleveraged Russian consumer that historically has not had access to a full suite of consumer products. We are positive about on food retailers, the leading search engine in Russia, and the nation's largest retail bank. We are cautious on those sectors and companies under tight government control, such as state-controlled Gazprom and the utilities sector. (pg. 21)
The report also contains outlooks and portfolio strategies for the Czech Republic, Hungary, Poland, Turkey and South Africa.
The report reflects thinking of Mirae Asset's global team of investment professionals, including:
- Peter Lee, Ph.D., CFA, Head of Emerging Market Investment Strategy
- José Gerardo Morales, CFA, Chief Investment Officer — US and EMEA;
- Cong Li, Ph.D., Chief Investment Officer — Mirae Asset Global Investments (Hong Kong)
- Young Hwan Kim, Chief Investment Officer — Mirae Asset Global Investments (Brazil)
- Rahul Chadha, Head of AP Investment Division.
Emerging markets: Emerging market investing may be subject to additional economic, political, liquidity, and currency risks not associated with more developed countries. Investing in international markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. In addition, single-country and sector funds may be subject to a higher degree of market risk than diversified funds because of concentration in a specific industry, sector or geographic location. Investing in small- and mid-size companies is more risky than investing in large companies as they may be more volatile and less liquid than large companies.
Emerging Markets Risk — The risks of foreign investments are typically greater in less developed countries, which are sometimes referred to as emerging markets. For example, political and economic structures in these countries may be changing rapidly, which can cause instability and greater risk of loss. These countries are also more likely to experience higher levels of inflation, deflation or currency devaluation, which could hurt their economies and securities markets. For these and other reasons, investments in emerging markets are often considered speculative.
About Mirae Asset Global Investments
Mirae Asset Global Investments is one of the world's largest investment managers in emerging market equities (Investments & Pensions Europe, January 2014). With over 550 employees, including 123 dedicated investment professionals, Mirae Asset offers a breadth of emerging markets expertise. Mirae Asset's offices are located in Australia, Brazil, Canada, China, Colombia, Hong Kong, India, Korea, Taiwan, the U.K., the United States and Vietnam. The firm manages over $56 billion in assets globally through a diversified platform to offer market-leading franchises in traditional equity and fixed income products, ETFs and alternative strategies, such as real estate, private equity and hedge funds. Mirae Asset Global Investments (USA) LLC is focused on providing equity and fixed income investment advisory services to mutual funds, foreign investment trusts and institutions. (www.miraeasset.com)
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