Mirae Asset Global Investments Releases "2013 Emerging Markets Outlook"
Emerging Markets Expert Sees Emerging Economies' Share of World Gross Domestic Product (GDP) Increasing; Domestically - Led Growth Will Continue as an Important Thematic Driver
January 15, 2013
In a report issued today, senior investment professionals from emerging markets expert Mirae Asset Global Investments announced that they believe emerging economies will remain the driver of global output, led by China. For 2013, the Mirae Asset Investment team also believes that focusing on key investment themes, especially the continuation of domestically-led growth, remains important.
Assembled from contributions by senior investment professionals in Hong Kong, São Paulo, Seoul and New York, "2013 Emerging Markets Outlook" provides a 23-page overview of Mirae Asset's latest insight on the opportunities and risks in emerging markets equity investing for the coming year.
The report comprises a brief 2012 review and 2013 outlook on regions and individual markets for Asia/Pacific (including China, India, Association of Southeast Asian Nations (ASEAN) and Korea), Latin America (including Brazil, Colombia, Chile and Peru) and Europe, Middle East and Africa (EMEA) (including Russia, Turkey, South Africa and Central European 3 (CE3): Czech Republic, Hungary, Poland). Regional excerpts from the report appear below as well as select portfolio strategies to take advantage of investment opportunities. The investment professionals who contributed to the report are listed at the end of this release.
Broad Outlook: Emerging Markets to Reach an Inflection Point in 2013
After two years of downward revisions in equity earnings, Mirae Asset expects emerging markets to reach an inflection point in 2013. Emerging markets' contribution to world gross domestic product (GDP) growth is expected to become larger than in the past, as structural deleveraging in the developed world will likely persist throughout 2013. (pg. 2)
Key Themes: Domestically-led growth will be the key thematic driver within emerging economies and industries and companies driven by those factors could continue to outperform in emerging markets. (pg. 2) Another important theme to watch for is a rotation to global cyclical stocks, which have seen a multiyear derating to very low valuations. This rotation, however, will require evidence of a more sustained recovery in global growth. Other important themes for 2013 include structural reform agendas in emerging markets. China, once again, is key, while reform will also be on the table in Brazil, Russian and Mexico. Although long term in nature, any progress in reform agendas could have important implications for return dynamics.
Key Risks for Equities: These include getting the cycle wrong. Should global growth continue to gain momentum, sector rotation would occur rapidly. Defensive positioning in emerging market equities, as well as an asset allocation positioning favoring emerging market bonds to equities, would result in underperformance. (pg. 7)
Outlook: Asia/Pacific – Hope Dominates Fear
Equities continued to climb a wall of worries in 2012, but closed at the high for the year. Tail risks of a euro zone meltdown and a hard landing in China were managed by pragmatic policy making. Asia Pacific ex-Japan, which rallied to end the year up 22.5%, seems to already discount part of the recovery. Further upside would be contingent on whether economies build on festival season momentum.
Data for the Purchasing Managers' Index, the Index of Industrial Production and exports indicate a recovery in the Asia Pacific region. Key leadership decisions in China passed smoothly and initial sound bites from the new Chinese leadership have been market- and reform-oriented, but we need to see follow-up action on encouraging private sector investment, shifting away from investment-heavy to consumption-driven growth. (pg. 8)
Country-Level Themes: China: Twilight Zone (pg. 9); India: Unfinished Agenda of Reforms (pg. 11); Korea: Expecting Gradual Uptrend Amid Slow Global Economic Growth (pg. 12); ASEAN: Thailand, Indonesia and the Philippines to Watch (pg. 12)
Portfolio Strategy: We are positive on equities for 2013, although not outrightly bullish. We believe that the earnings downgrade cycle has ended. We also believe that economic recovery will be slower than in previous cycles as the economies of China and India work to correct their imbalances and are restricted in their ability to pump prime growth.
Sectors: We continue to believe that domestic consumption and financials will help to reflate economies and provide for stronger performance in 2013 in the region. We continue to hold overweight positions in China, India, Thailand, and Indonesia. Within resources on a structural basis, we like oligopolies such as cement in India and Indonesia, as we believe that the global economic recovery will be slow and drawn out. Capacities are plentiful for both industrials and commodities, and it will be some time before pricing power returns and businesses will be faced with the constant challenge of cost inflation. (pg. 8)
Valuations: Valuations remain reasonable for MSCI Asia Pacific ex-Japan at calendar-year 2013 with 12 times price/earnings, 1.6 times of price/book and dividend yield of 3.5%. Improving liquidity and data points may see some allocations shift from bonds to equities. A part of this appetite, however, would be met by fresh fundraising by corporates, as equity raising has been subdued over the last six to nine months. We believe that inflows to the region may continue as investors get more optimistic on equities and become more confident of the leadership change in China. (pg. 9)
Outlook: Latin America – Learning to Live with Volatility
The fragile global economic backdrop is likely to cause continued volatility for Latin American equities into the first quarter of 2013. The developed world is undergoing a prolonged phase of structural deleveraging, both at the household and at the sovereign level. As a result, the emerging world will likely remain the driver of global output, led by China, with positive implications for Latin America, a key trading partner.
Brazilian earnings revisions are bottoming, Mexico is undergoing significant structural reform, and the Andean markets are set for another year of robust growth. In the current environment of low global economic and earnings visibility, companies delivering stable earnings growth and reliable cash generation are likely to command a rising premium. The search for yield will increasingly force asset allocators toward higher risk assets, including equities, resulting in rising premiums for dividend-paying blue chips with strong balance sheets. Latin American income properties, airports and toll roads fall into this category. (pg. 14)
Country-Level Themes: Brazil: In Need of a Confidence Boost (pg. 15); Mexico: Flying High; Colombia, Chile and Peru: Again Expected to Deliver Growth Above Region's Giants (pg. 17)
Portfolio Strategy: Latin American domestic consumption stories are expected to outperform the general market in 2013, as direct beneficiaries of rising real income levels, spending power and credit penetration.
Sectors: Regional demographics support multi-year demand growth for consumer products and services, including insurance, education, health care and financial services. Retailers will continue to benefit from high and rising demand for apparel, white goods and pharmaceuticals. Given multi-year underperformance of global cyclicals vs. domestic cyclicals across Latin America, we see room to accumulate well-capitalized commodity names offering dividend support, yet without turning outrightly bullish. In Brazil, the government has been explicit in its support of industry and the export sectors, and following significant currency depreciation in 2012, multi-year laggards such as steelmakers and pulp producers are entering a phase of earnings upgrades.
Valuations: We are identifying pockets of overvaluation in consumer sectors, and now favor early-cycle consumer discretionary and financials over staples. Industrials and health care stand out as combining structural growth, government support and reasonable valuation. (pg. 15)
Outlook: EMEA – Overall Subdued, But Focus on Russian Consumer and Internet Segments
EMEA has a mix of heavy exposure to Europe (Central Europe) and natural resources (Russia and South Africa), both of which appear unexciting in 2013. Hence, our outlook for much of the region is subdued for 2013. Central Europe will continue to be weighted down by the lack of growth in Europe, while the GDP growth of both Russia and South Africa will be subdued. Turkey stands out as the most attractive within the region, as it has favorable demographics and also benefits from lower commodity prices. After slowing down in 2012, Turkey should experience an acceleration of economic growth in 2013. Overall, domestic growth drivers will remain key to the region and, thus, we remain most positive on stocks exposed to domestic consumption, as well as the growing wealth and development of the consumer. (pg. 18)
Country - Level Themes: Russia: Unexciting Growth (pg. 19), Turkey: Reacceleration of Economic Growth (pg. 20), South Africa: More of the Same (pg. 20), CE3 (Czech Republic, Hungary, and Poland): Cautious From Proximity to Euro Zone (pg. 23)
Portfolio Strategy: We maintain a cautious stance on Russian equities as we see limited upside for commodities and oil, two major components of the Russian economy, which could provide a headwind for the country's equity markets. (pg. 19) We remain constructive on Turkish equities, given the country's improving current account deficit, reduced financing costs and reasonable valuations. (pg. 20) As for South Africa, we are more cautious on its equities, owing to the economy's subdued outlook in 2013. (pg. 22) The CE3 represented by the Czech Republic, Hungary and Poland all have close ties to the Euro Zone, especially Germany. We remain cautious on the region as weak economic growth in Europe directly affects these countries. (pg. 23)
Russian Sectors: The Russian consumer remains healthy, benefiting from record-low unemployment and real wage growth. With this in mind, we continue to focus on companies exposed to the development of the Russian consumer. We also remain constructive on the fast-growing Internet segment in Russia. (pg. 19)
Turkish Sectors: We are invested in companies that will benefit from a reacceleration in GDP growth and, in particular, those exposed to a rebound in domestic consumption. Hence, we like banks, which will benefit from a reacceleration of loan growth, and companies that are levered to the consumer. (pg. 20)
South African Sectors: Despite a slowing of real disposable income growth, the growth is still positive, and the consumer continues to benefit from record-low interest rates. Hence, we continue to remain positive on select consumer names. (pg. 22)
The report reflects thinking of Mirae Asset's global team of investment professionals, including:
- Peter Lee, Ph.D., CFA, Head of Global Investment Unit (Seoul/Hong Kong)
- José Gerardo Morales, CFA, Chief Investment Officer – US and EMEA (New York)
- Cong Li, Ph.D., Chief Investment Officer – Asia Pacific (Hong Kong)
- Rahul Chadha, Asia Pacific Equity Portfolio Manager (Hong Kong)
- Yong-Deok Koo, Korean Equity Portfolio Manager (Seoul)
- Young Hwan Kim, Chief Investment Officer – Latin America (São Paulo)
- David I. Feygenson, EMEA Equity Portfolio Manager/Investment Analyst (New York)
Gross Domestic Product (GDP) - The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments, and exports less imports that occur within a defined territory.
Association of Southeast Asian Nations (ASEAN) - An organization of countries in southeast Asia set up to promote cultural, economic and political development in the region. ASEAN was officially formed in 1967 with the signing of the Bangkok Declaration.
Europe, Middle East and Africa (EMEA) - The region classification for a division of an international company that operates in Europe, the Middle East and Africa. The division that operates in the EMEA will often be run by a separate executive and focus the international brand towards the needs of the EMEA region.
Central European 3 (CE3) - The region classification for a division of an international company that operates in Czech Republic, Hungary and Poland.
Purchasing Managers' Index (PMI) - The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Price/book - A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
Dividend Yield - A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock
There can be no guarantee that any investment strategy will be successful. All investing involves risk, including the potential loss of principal.
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. Similarly, investors are also subject to foreign securities risks including, but not limited to, the fact that foreign investments may be subject to different and in some circumstances less stringent regulatory and disclosure standards than U.S. investments.
Equity Risk - equity investments are more volatile and carry more risk than other forms of investment including investments in high grade fixed income securities.
Geographic Concentration Risk - A small number of companies and industries may represent a large portion of the market in a particular country or region, and these companies and industries can be sensitive to adverse social, political, economic or regulatory developments in that country or region.
Past performance is no guarantee of future results.
You should carefully consider the investment objectives, risks, charges and expenses of the Mirae Asset Discovery Funds before making an investment decision. A prospectus with this and other information about the Funds may be obtained by visiting www.miraeasset.com or by calling (866) 335-3417. Please read the prospectus carefully before investing as it explains the risks associated with investing in international markets.
Mirae Asset Global Investments (USA) LLC is the investment advisor for the Mirae Asset Discovery Funds. The Mirae Asset Discovery Funds are distributed by Funds Distributor, LLC.
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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