Mirae Asset Global Investments Releases "2014 Emerging Markets Outlook"
Emerging Markets Expert Sees Diverging Markets in Developing World; Selective Bottom-up Approach Imperative as Disparities among Economies Widen
January 7, 2014
In a 20-page report issued today about the 2014 opportunities and risks in emerging markets equity investing, senior investment professionals from Mirae Asset Global Investments underscored the importance of distinguishing among what have become diverging markets within the developing world. The report notes that wide disparities among economies, even within the same region, will manifest themselves through varying emerging market equity market performance.
For 2014, the Mirae Asset investment team believes that selective investment through a bottom-up approach is imperative when investing in the emerging markets. The report also notes that China's reform efforts suggests that the Chinese government is focused on rebalancing its economy to achieve a more sustainable and higher-quality growth trajectory.
Made up of contributions by senior investment professionals in New York and Hong Kong, the "2014 Emerging Markets Outlook" (click here) includes a four-page "China in Focus" special report on key reforms from the country's Third Plenum Session and its Shanghai Pilot Free Trade Zone.
The report comprises a brief 2013 review and a 2014 outlook on regions and individual markets for Asia/Pacific (China, India, Korea, India and Association of Southeast Asian Nations (ASEAN)), Eastern Europe, Middle East and Africa (Russia, Poland, Turkey and South Africa), and Latin America (Brazil, Mexico, Colombia, Chile and Peru). 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: Policy Decisions Continue to Play Key Role in Global Markets as China Emerges as Positive Market Influence
While the broad emerging markets universe significantly underperformed the developed markets in 2013 over concerns of slower emerging market growth and tapering of the U.S. Federal Reserve's quantitative easing (QE) program, Mirae Asset believes that policy decisions, such as the recent U.S. Fed tapering, will continue to play a key role in the global markets in 2014.
The confidence in the U.S. economy expressed by the Fed should serve as a positive undertone for the financial markets. At the same time, Mirae Asset expects to see other major central banks, such as the Bank of Japan and the European Central Bank, continue to funnel liquidity into the markets. Meanwhile, the concerns surrounding U.S. fiscal policy that weighed on global markets going into 2013 have, for the most part, subsided and are not expected to be a meaningful headwind in the upcoming year. (p. 2)
Key Themes – China, which many feared would experience a hard landing, has recently emerged as a positive market influence after demonstrating that its economy has stabilized and is putting forward credible plans for reform following the completion of China's Third Plenum in November. Investors are expected to remain focused on China's restructuring from an investment-led economy to one that is more balanced and consumption-led. (p. 2)
Outlook: Asia/Pacific – Asia to Remain A Key Driver of Global Growth
In addition to the focus on China's government reforms and progress towards rebalancing its economy, there will be continued attention on the U.S. Fed policy normalization and its impact on various regional economies. However, underneath all the noise of Fed tapering and Chinese rebalancing, we believe that Asia remains a key driver of global growth. The key to this growth is Asia's domestic demand story.
In India and ASEAN countries, political development should be closely monitored, especially the important elections in India and Indonesia. These upcoming elections will likely increase uncertainty and market volatility, but may prove vital in reviving growth and in setting the direction for future structural reforms. (p. 3)
Country Themes – China: Reforms are expected to start with the implementation of market-driven mechanisms and deregulations in many industries, and the Shanghai Free Trade Zone will be the test market for these changes (p. 8). India: The Reserve Bank of India has a new and credible governor who already has instituted effective, forward-looking measures including plans of financial reform (p. 6). Korea and Taiwan: Significant economic pick-up remains elusive given the relative exposure that these economies have to cyclical sectors, and given their less compelling demographics (p. 5). ASEAN: The region will go through a period of uncertainty over the coming quarters until political clarity emerges in Indonesia and Thailand. However, ASEAN's favorable demographics are important to the equity growth story and, if backed by good governance, may provide another investment opportunity for investors. (p. 7)
Portfolio Strategy – Overall, our investment strategies remain focused on companies with scalable business models and unrivaled execution capability. Consumption continues to be a core theme.
Sectors – We favor consumption themes especially in those underpenetrated, rapidly growing segments such as branded snacks, travel and entertainment, luxury goods and healthcare. We are also positive on consumer-focused banks and insurance companies of China, India and ASEAN as they may benefit from the rising consumption and retirement savings trend. A cleaner and greener China through wind and gas distribution companies also remains a key theme as China shifts to higher quality and sustainable growth. Last but not least, technology as a harbinger of changing consumer habits through social networking sites and an e-commerce shift is of interest, along with smartphone and IT services for software customization. (p. 5)
Valuations – Following the strong performance of developed markets in 2013, Asia has been trading at a historically high discount. We believe the valuation gap will narrow throughout 2014 as investors become more confident in the Asian growth story through higher visibility in China's transition towards a market economy and a growth revival in India and Indonesia through progressive leadership after the elections. (p. 5)
Outlook: EEMEA – Improved Economic Growth in 2014 Should Help Buoy Equity Markets
Authors of the report believe 2014 will be an interesting year for the Eastern Europe, Middle East and Africa region as Greece rejoins the MSCI Emerging Markets Index. The United Arab Emirates and Qatar will also join the index in May 2014. The addition of these countries will increase the weight of the EEMEA region in the index and expand the diversity of investment options.
The region is heavily exposed to Europe and any improvement in economic growth there will disproportionately benefit EEMEA relative to other emerging market regions. Countries such as Poland and Greece stand out in this regard. The U.S. Federal Reserve's tapering plan could also have a material effect on equity market performance in the region (both positive and negative) as countries that have material fiscal and/or current account deficits, such as Turkey and South Africa could be vulnerable, while Russia could be a beneficiary. (p. 12)
Country Themes – Russia: While the report is generally positive on the Russian market in the context of emerging markets, the market should be still viewed as one to trade. (p. 13) South Africa: The report is cautious on South Africa with its sluggish economy and twin deficits (fiscal and current account). Greece: According to the report, this economy provides the most direct way to play stabilization of the Eurozone. Turkey: The long-term view is bullish, but near-term, the country faces headwinds as the Central Bank tries to navigate rising inflation without directly raising interest rates. (p. 14)
Portfolio Strategy – Commodities play a big role in EEMEA and with a generally unexciting outlook for commodities in 2014, markets such as Russia and South Africa will not have a tailwind, but also should not face significant headwinds. Given so many moving pieces, we believe stock selection will be key to investing in this region in 2014. The region offers a number of bottom-up investment opportunities that benefit from strong earnings growth and structural growth stories that makes us cautiously optimistic in 2014. (p. 12)
Russian Sectors – We remain invested in high-quality companies in industries generally left alone by the government such as retail and Internet, or in companies that benefit from government policy such as oil service companies that benefit from local content requirements. We remain most positive on consumer-oriented sectors, including Internet stocks. (p. 13)
Turkish Sectors – We are constructive on companies that benefit from structural growth stories, such as auto companies and airlines, and other sectors that will be assisted by government policies likely to favor consumer spending ahead of local elections in 2014. (p. 15)
South African Sectors – We favor select consumer names exposed to the upper-end consumer that benefit from low interest rates, and healthcare names that take advantage of increased healthcare spending. (p. 15)
Valuations – While Russia remains cheap relative to the emerging markets, the question remains, Can the gap narrow? We see reasons for optimism in 2014. (p. 13) EEMEA ex-Russia is now trading at a slight premium relative to its 10-year history on a forward P/E basis,Poland and South Africa are trading at premiums, and Turkey is trading at a slight discount. Although we do not expect a wholesale market re-rating, an acceleration of earnings growth should lead to decent performance in the region. (p. 14)
Outlook: Latin America – Region to Post Moderately Higher Output in 2014
Growth, confidence and politics are likely to underpin absolute and relative performance of Latin American equity markets in 2014. Despite weaker terms of trade having translated into deteriora-tion in the regional current account balance, the investment environment remains attractive given high levels of foreign direct investments and low dependence on external debt. The development of Latin America's capital markets is a structural trend supported both by demographics and income growth, and we view the long-term risk-reward balance as favorable.
Following a year of downward revisions to growth forecasts in 2013, we expect Latin America to post moderately higher output in 2014, closer to the region's non-inflationary potential of around 3.5% per annum. Whereas regional equity markets disappointed in 2013 due to weak earnings and currency depreciation, we forecast a gradual recovery in 2014 assuming a moderate improvement in growth, broad macro and political stability, and an orderly dialing down of liquidity provisions within key developed markets. (p. 16)
Country Themes – Brazil: The trajectory of its economy will be impacted both by presidential elections and major sporting events. Mexico: Is expected to return to robust growth following a brief hiatus in 2013. Chile, Colombia and Peru: Investment backdrop continues to be attractive and the Andean region as a whole remains a high-growth opportunity. (p.19)
Portfolio Strategy – Latin American domestic consumption stories remain a strong theme and we favor select names in consumer, industrials and financials.
Sectors – The development of the middle class will remain a key theme within Brazil, favoring sectors such as financial services, education and retail. We also seek exposure to exporters via the food producers, mining, steel, packaging and aerospace subsectors. (p. 17) Within the Mexican equity market, we see attractive upside in the banking, commercial real estate and industrial sectors. We view the Andean region's banks as an attractive investment opportunity, given high growth, comfortable capital levels, and strong franchise value. For Colombia, we favor the financial and materials sectors. We favor exposure via banks and infrastructure in Peru, while we believe that the mining sector will be a major recipient of FDI and a key component of overall growth. (p. 19)
Valuations – At the beginning of 2014, Brazilian equities are approximately 50% below their 2008 highs in dollar terms. This deep underperformance versus the global asset class since mid-2008 reflects high index exposure to the commodity sectors, increasing micro-management of the economy by the government, a lack of productivity gains, and the perennial impediments to higher growth rates (low levels of savings and investment). We believe that Mexican equities deserve their valuation premium to the region based on higher earnings visibility, lower cost of capital, and more stable returns.
The report reflects the thinking of Mirae Asset's global team of investment professionals, including:
- José Gerardo Morales, CFA, Chief Investment Officer – Mirae Asset Global Investments (USA)
- Young Hwan Kim, Deputy Chief Investment Officer – Mirae Asset Global Investments (USA)
- Rahul Chadha, Co-Chief Investment Officer – Mirae Asset Global Investments (Hong Kong)
- Byung Ha Kim, Co-Chief Investment Officer – Mirae Asset Global Investments (Hong Kong)
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.
Eastern Europe, Middle East and Africa (EEMEA) - The region classification for a division of an international company that operates in Eastern Europe, the Middle East and Africa. The division that operates in the EEMEA will often be run by a separate executive and focus the international brand towards the needs of the EEMEA region.
Foreign Direct Investment (FDI) - is an investment made by a company or entity based in one country, into a company or entity based in another country.
Price to Book Value (P/BV) - is a valuation ratio and is arrived by dividing the market price of a share with the respective company's book value per share.
Quantitative Easing (QE) - is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market.
Return on Equity (ROE) - is the amount of net income returned as a percentage of shareholders equity.
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)
Makovsky + Company