Thematic Investments: Emerging Markets
A Group Worth Watching over 2013
Background
- Emerging markets (EM) have underperformed developed markets throughout the past two years. We believe this stems from the deteriorating growth/inflation trade-off in 2011, which saw policy tightened across the EM region. The market (including us) had expected growth to recover in 2012, but delays in rolling out stimulus saw expectations revised down markedly throughout the year. We expect 2013 to prove more positive on this front. Our economists expect EM GDP growth to rebound back above 5% (compared with just 1.2% in the developed world), whilst softening commodity prices – driven partly by an increase in supply – suggest we won’t see a resurgence of inflation.
Prospects
- Investors
remain very pessimistic towards the EM region, despite some encouraging
signs recently, with economic data finally improving and positive news
on reforms in some of the larger markets. Mutual funds have been
reducing their holdings over the course of 2012 and are now over 2
standard deviations underweight compared with history. The region continues to offer good value – it currently trades
at an 8% discount to DM on a price-to-book basis, compared with an
average premium of 7% over the past five years. We therefore believe EM
is well positioned to outperform as risk appetite returns. We remain
positive on the region from a global perspective, with overweight
positions on Brazil, China and Russia.
Asia ex-Japan
- Asia-ex-Japan offers compelling valuations and remains very unloved by investors. The market currently trades on a relative price-to-book of 0.9x, which is over 10% below its long-term average. Although global mutual funds are overweight in absolute terms, they have reduced their holding significantly in recent months and are now almost 3 standard deviations underweight compared with history.
- Importantly, we are also finally beginning to see some positive signs on growth, which could provide a catalyst for a re-rating of the region. Indeed, whilst Asian earnings estimates continue to be revised down, the pace of downward revisions has slowed and the region’s revisions ratio has actually turned positive relative to the rest of the world. This is often a positive sign for equities, and we would expect further upward revisions as the economic data continues to improve.
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|  1- Fundamental Equity Analysis & Analyst Recommandations - BRIC |
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| 2- Fundamental Equity Analysis & Analyst Recommandations - ASEAN |
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| 3- Fundamental Equity Analysis & Analyst Recommandations - EMEA |
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