Emerging market re-emergence

With the collapse of commodity prices, emerging markets (EMs) are taking a beating. EM currencies are near all-time lows in US dollar terms. Most Canadian investors are familiar with the effect of weakness in the commodity space and understand the impact this has on economies specializing in the extraction of natural resources.

However, in spite of these well-known challenges, some long-term investors consider a few EMs to be ripe for investment.

Source: BCA Research Inc.

Whether a country is a component of BRIC1, BRICET2, BRICS3, MINT4 or the Next Eleven5, applying the term EM to a country or an economy is imprecise, at best. A good definition is found at Investopedia and the Financial Times discusses the nuances of the meaning of the term. Regardless of how they are classified, there are countries where middle-income populations could develop into consumer engines that can differentiate that country from the more traditional characteristics of an EM.

In a recent article John Kemp found that 10 of the top 20 oil-consuming countries in the world are not members of the Organization for Economic Cooperation and Development (OECD).

Source: Reuters

In the table above, China and India are numbers 2 and 3 after the U.S. A decline in oil prices benefits those countries more than developed markets and other EMs that produce more oil. Here’s why India’s consumption has increased so much:

Source: Reuters

With a growing middle class that is increasingly mobile, India’s economy will require vastly improved infrastructure. There will be many opportunities for companies to build and maintain highways, ports, trains, power plants, airports etc. As Gary Shilling mentions in Bloomberg India’s population will eventually be larger than China’s and will have a more favorable ratio of working adults to retirees.

Source: BCA Research Inc. and MSCI Inc.

After years of volatility and a declining trend, the MSCI (Morgan Stanley Capital International) Emerging Markets Index turned positive at the beginning of this year. The index is trading well below levels of a decade ago.

The index is dominated by stocks in China, South Korea and Taiwan. Brazil and South Africa are also large components but these two countries could be in for a rough period as Brazil recently impeached their President and South Africa’s governing ANC party doesn’t inspire confidence with investment managers due to accusations of corruption.

Nigeria, the largest economy in Africa, is looking for $40B to $50B of additional investment, mainly for oil projects. The oil-producing country is expecting its output to increase to 2.2 million barrels a day.

Some EMs are showing progress in the technology space – especially with regards to the internet of things (IoT). According to a Hyundai Research Institute report, the global IoT market is expected to grow to over $1T by 2020 from its current size of $300B. The Hyundai report concludes that this will directly benefit South Korea. Taiwan could also be a major player in that boom.

EMs could be on the verge of an impressive recovery, after years of poor performance. Compared to an expensive U.S. stock market, returns in other parts of the world are likely to outperform, even after adjusting for much higher risk.

But all EMs are not alike and some economies classified as EMs have substantial problems and should be avoided by most investors.

Before deciding where to invest in the EM space investors should seek expert guidance.

Please speak to Hilliard or Jon if you want to learn more about investing in EMs.

 

Fraser Betkowski

 

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1Brazil, Russia, India, China

2BRIC + Eastern Europe and Turkey

3BRIC + South Africa

4Mexico, Indonesia, Nigeria and Turkey

5Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam

 

Hilliard, The MacBeth Group team and their clients may trade in securities mentioned in this blog.

 

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