Is There Hope From Emerging Markets – Are we being too G8-centric? Radio Clip

“Risk of acronym over-exuberancea pithy abbreviation does not necessarily equate to a profitable investment!” (Me!)

Click the image below to here my views on Emerging Markets (and the global economic outlook). It was broadcasted just the other week on “The N@ked Short Club” on Resonance FM – (2m+ listeners and growing!). Follow-on comment from Mike Gasior, CEO of AFS.

The Long-Term Case Summarised

  • Strength of balance sheets (10% D / GDP vs. 400% in UK)
  • High levels of savings to deploy rather than build (33% vs 17% of GDP)
  • FX reserves (75% of global forex)
  • Wider range of policy tools available

Most crucially

  1. The growth of emerging consumer class: an estimated 1bn are to join by 2030 , with the Chinese middle class to exceed the US population within a few yrs
  2. We have seen resolve: Industrial Production is above its pre-crisis peaks in emerging Asia and there are increasing levels of intra-regional trade (see chart below) – leading to countries becoming more insulated from pullbacks in demand from developed markets
  • From export-led to domestic-demand (and neighbor-demand) led
  • In just 14 years, Emerging Market exports to other developing countries (light blue) increased by 10%.

Although valuation and reputation concerns remain

Source: Automatic Trend Lines by the Ramp Pattern Recognition Program. MSCI EM has risen 135% above March low although still below previous peak for those who believe the long term trend is up.

A word of warning

  • As ever, DIFFERENTIATE between markets – they aren’t all as strong.
  • And market RISK OF CONTAGION remains – if international investors get spooked, they will  take risk off the table across the board regardless of fundamentals
  • INVEST IN QUALITY – should add value over longer-term.

We have had the “BRICs” (Brazil, Russia, India and China) and the calls just keep coming. Now the term “Chindonesia” (China, India and Indonesia) has been coined or even the “Civets” (not just cat-like mammals from Africa and Asia but Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa). But as my above quote states, there is a risk of acronym over-exuberance – a pithy abbreviation does not necessarily equate to a profitable investment! Often there are discrepancies between international investor excitement and the fundamentals of the economy and sentiment on the ground.

Specific Stock Example

Avoid anything with “Chinese Consumer” in the name, a beneficiary of this “over-exuberance” and have potentially, in some cases, become over-priced. Instead look for more indirect access to value and growth.

One such example – to be taken within the context of an admission of having spent little time evaluating the fundamentals sufficiently, is Want Want China Holdings, listed on the Hong Kong Stock Exchange – maker of rice cakes and flavoured milk in China as well as snack foods. Has rallied 24% YTD to a PE, according to Reuters, of around 33x, above that of its sector. A different angle is Olam International, listed in Singapore, – global leader in supply chain management of agriculture products and food ingredients, which has underperformed Want Want by almost 7% YTD and cheaper than the sector average (PE 19x).