State of decay: Does government control erode EM value?

In more developed markets, concern over state intervention centres around central bank policymaking. While that is of course highly relevant across emerging markets too, there is in fact an even larger state-led consideration when investing in these markets: the fact that c.23% of the MSCI Emerging Markets index is comprised of state-owned enterprises (SOEs).

The majority of these companies are not run with profit-maximising intention. They tend to be strategic state assets such as banks, or utility and resources companies, with heavy capital-expenditure burdens. This tends to make them poor stock investments over the long term, though a major commodity bull market can change the optics temporarily. Return on equity (ROE) is usually less important than other strategic desires of the state in capital-allocation decisions.

State ownership can provide stability, but this may involve significant shareholder value dilution, as minority investors tend to be a low priority in stressed situations or in capital-allocation decisions. Interestingly, we saw such dilution with many Western banks following the global financial crisis, and emerging-market companies are perhaps even less likely to focus on shareholder value in such situations.

We currently take zero exposure to SOEs and find the technology, consumer and health-care sectors are relatively free from state control and are where we find the most interesting investment opportunities.

Naomi Waistell, portfolio manager Emerging and Asian equity team. Newton Investment Management – a BNY Mellon Company

In more developed markets, concern over state intervention centres around central bank policymaking. While that is of course highly relevant across emerging markets too, there is in fact an even larger state-led consideration when investing in these markets: the fact that c.23% of the MSCI Emerging Markets index is comprised of state-owned enterprises (SOEs). The majority of these companies are … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Emerging market sell-off: an untimely exit?

There is no doubt emerging markets have had a rough run since the start of the year, and it is easy to understand why investors are skittish. Events, such as Italian politics and Trump’s future behaviour on trade, could create negative shocks and are tough to measure or anticipate. However, we think the move away from EM may be premature; our global macro outlook actually supports the asset class.

We expect the main external drivers lead to a reversal of recent trends and bolster EM assets such as local currency debt. While US rates will likely continue moving a bit higher, the bulk of expected Federal Reserve hikes are already priced in forward curves. A relative healthy global growth outlook continues to support commodity prices, an obvious boon to many commodity exporters. Finally, we believe some fundamental drivers for US dollar depreciation remain intact. We also think the dollar is expensive, particularly when considering mounting twin external and fiscal deficits. As the dollar begins to slide, which we expect, it will create a tailwind for the asset class. While we may have to be more patient, we think the asset class will recover and likely post notable returns.

Federico Garcia Zamora – portfolio manager. Standish, BNY Mellon Asset Management North America

There is no doubt emerging markets have had a rough run since the start of the year, and it is easy to understand why investors are skittish. Events, such as Italian politics and Trump’s future behaviour on trade, could create negative shocks and are tough to measure or anticipate. However, we think the move away from EM may be premature; … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Measure for measure: Putting the emerging market debt sell-off in context

Emerging market debt (EMD) has had challenging year-to-date performance, and investors are questioning whether this is merely a performance correction after a strong two-year spell, or the start of something bigger. There are some similarities between the current sell-off and 2013’s ‘taper tantrum’, with both influenced to an extent by Federal Reserve (Fed) policy normalisation. If this serves as a useful point of reference, much of the sell-off has already likely materialised. Chief among investor concerns are two key global macro risks with uncertain outcomes – policy normalisation and trade protectionism. This backdrop of global macro uncertainty has intensified the focus on emerging market (EM) vulnerabilities. However, technicals rather than fundamentals have exacerbated this sell-off, with a big unwind of cross-over investor positioning. Relative to 2013, we believe EMs are in a fundamentally stronger position in aggregate. The dislocation created as a result of the indiscriminate selling may also create new investment opportunities for investors able to adopt a flexible approach.

Colm McDonagh – head of Emerging Market Fixed Income. Insight Investment, a BNY Mellon company

Emerging market debt (EMD) has had challenging year-to-date performance, and investors are questioning whether this is merely a performance correction after a strong two-year spell, or the start of something bigger. There are some similarities between the current sell-off and 2013’s ‘taper tantrum’, with both influenced to an extent by Federal Reserve (Fed) policy normalisation. If this serves as a … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Emerging markets play leapfrog, but how?

The smartphone has broken down market barriers and created rapid change in various industries. For emerging market economies, the technology has given consumers a powerful tool, allowing emerging market companies to surpass their developed counterparts in some sectors as they leapfrog traditional business models. In China, mobile applications such as Alipay and WeChat have created platforms that are deeply integrated into people’s lives and, as a result, mobile payments are soaring. In Africa McKinsey forecast that 450 million people will be using mobile banking within the next five years, meaning there is little need for physical branch infrastructure. For remittance flows, mobile applications allow the easy transfer of money, creating significant capital flows from the developed to emerging world as workers send money home. This is an evolution which has only just begun and which will increasingly blur the lines between the developed and emerging world, forcing investors to change how they think about the opportunity set available in the latter.

Colm McDonagh – head of Emerging Market Fixed Income. Insight Investment, a BNY Mellon company

The smartphone has broken down market barriers and created rapid change in various industries. For emerging market economies, the technology has given consumers a powerful tool, allowing emerging market companies to surpass their developed counterparts in some sectors as they leapfrog traditional business models. In China, mobile applications such as Alipay and WeChat have created platforms that are deeply integrated … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Against the grain: Which emerging market’s fund industry grew 50% in a year?

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management.

Around 60,000 mutual fund accounts are being opened every day in India, and Indian mutual funds have almost doubled their assets under management (AUM) in just over three years.

The Indian mutual funds market has gone through three distinct phases over the past 13 years, with compound annual growth rates (CAGR) improving markedly over the past three years, on the back of higher market returns and stronger flows following demonetisation last November.

Given that the penetration of mutual funds in India as a proportion of GDP is less than a quarter of the global average, and below that of many other emerging markets, we believe there is a long ‘runway’ for growth in this area.

Sophia Whitbread – portfolio manager on the Newton Emerging and Asian Equities team. Newton, a BNY Mellon company.

Historically, some 30% of Indian GDP has been in savings – typically gold and property – but demonetisation in November 2016 and the Aadhaar scheme are, together, encouraging these savings into the financial system. Moreover, this environment of plentiful liquidity is driving down funding costs for lenders and spurring the fees of businesses related to asset management. Around 60,000 mutual … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
In emerging markets, managing foreign exchange risk is critical

One major change in recent years is how policy makers in many emerging markets have become comfortable with using currency as a buffer to insulate their economies from negative shocks. Among the first lines of defence against any political, economic or external shock is to allow currency weakness, with authorities only stepping in to counter falls once they become significant enough for inflation pass-through to become a concern. As such, management of currency risk in order to control volatility and avoid potential losses has become even more important.

Colm McDonagh – head of EM fixed income. Insight investment, a BNY Mellon company

One major change in recent years is how policy makers in many emerging markets have become comfortable with using currency as a buffer to insulate their economies from negative shocks. Among the first lines of defence against any political, economic or external shock is to allow currency weakness, with authorities only stepping in to counter falls once they become significant … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Could these EM challengers displace Silicon Valley?

Could US tech stocks be eclipsed by a new wave of emerging market (EM) challengers? We think that’s a key question for the coming months and years as China and India pick up the pace in their adoption of new technologies.

We note, for example, that China has some 40% of the world’s artificial intelligence (AI) scientists as well as five of the 10 most highly valued tech ‘unicorns’.*

Global internet usage and e-commerce statistics paint a similar picture. In 2015, for example, India displaced the US as the second largest internet user population. India is also building a global lead both in its number of smartphone users and the number of e-commerce sales transacted on mobile phones.

We think this highlights an important point. For all their status as the darlings of Wall Street, the current crop of US tech leviathans face a serious challenge. As EMs create their own centres of expertise, we believe investors may be well served by looking beyond the narrow confines of Silicon Valley to a wider world of global innovation.

Drew Guff – Siguler Guff, a BNY Mellon company

* Unicorns’ are defined as unlisted tech companies with a valuation above US$1bn.

Could US tech stocks be eclipsed by a new wave of emerging market (EM) challengers? We think that’s a key question for the coming months and years as China and India pick up the pace in their adoption of new technologies. We note, for example, that China has some 40% of the world’s artificial intelligence (AI) scientists as well as … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Can China maintain its role as an engine of global growth?

Since its accession to the WTO in December 2001 China has accounted for an increasing share of the global economy. Helped by fast export and investment growth it remains an engine of trade and is expected to generate some 35% of global growth over the next two years, according to the World Bank’s latest forecast.

The country is also plagued by structural challenges however, most notably the uncomfortable legacy of a massive state-inspired credit expansion in the wake of the global financial crisis. As such, it’s attempting a tricky transition from a credit-fuelled growth model that is overly reliant on investment to one more driven by private consumption and services. It remains unclear how the dynamic between cooling credit growth and supporting GDP growth will ultimately unfold.

The good news is that China’s economy has been gradually but demonstrably rebalancing towards a growth model that is less reliant on investment, with new industries coming to the fore. Our base case is therefore for China to continue to slow down structurally, with growth being supported as necessary by the authorities as they manoeuvre policy settings to bring this about gradually.

We believe this provides an opportunity for investors to gain exposure to companies benefitting from China’s rapidly expanding services industry and fast-growing middle class. We remain cautious on banks given the probability that asset quality becomes more problematic as the cycle continues.

Douglas Reed – Newton, a BNY Mellon company

Since its accession to the WTO in December 2001 China has accounted for an increasing share of the global economy. Helped by fast export and investment growth it remains an engine of trade and is expected to generate some 35% of global growth over the next two years, according to the World Bank’s latest forecast. The country is also plagued … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
The remittances spike and its impact on global capital

Remittance flows have become an increasingly important element of global capital flows. As labour markets have become more globalised, workers move from developing countries in order to obtain higher salaries in the developed world. Often these workers continue to support family members in their country of origin and regularly send a portion of their salary to them. In countries such as Mexico and India, governments have worked with the banking industry to lower transaction costs and make the process more efficient. As labour markets in developed countries tighten, so the upward trend should resume. One danger is that the size of these flows is now drawing political attention in some developed countries and could become a discussion target for trade negotiations if imbalances become too high. That said, we don’t believe we are quite at that stage yet.

Colm McDonagh – Insight, a BNY Mellon company

Remittance flows have become an increasingly important element of global capital flows. As labour markets have become more globalised, workers move from developing countries in order to obtain higher salaries in the developed world. Often these workers continue to support family members in their country of origin and regularly send a portion of their salary to them. In countries such … read more

  • Download
  • Print
0 comments | Join the conversation, comment now
Emerging Markets: busting the myths

The introduction of India’s first infrastructure investment trust, called IRB, in May underscores the expectation infrastructure spend will be a key driver of the country’s growth over the next few years.

The IRB trust, which holds six toll roads, features a 10-12% yield and it is likely to be the first of many such listings. To put this in context, just 10% of the Indian market’s large cap stocks yield more than 3%.

The government has plans for some US$20bn infrastructure spend on roads but we think trusts like IRB may benefit from more than just increased government spending.

Aviation, for example, is another key focus for the government. In 2016 there were some 150 million domestic flight journeys in India, compared to c900 million in the US and around 500 million in China. Air travel may cost more but it takes around 1/6th the time. As such we expect to see the number of airports increase and they are likely to go private (as public-private partnerships).

Naomi Waistell – Newton, a BNY Mellon company

Register for the upcoming live panel debate on Emerging Markets

The introduction of India’s first infrastructure investment trust, called IRB, in May underscores the expectation infrastructure spend will be a key driver of the country’s growth over the next few years. The IRB trust, which holds six toll roads, features a 10-12% yield and it is likely to be the first of many such listings. To put this in context, … read more

  • Download
  • Print
0 comments | Join the conversation, comment now