emerging markets outlook
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Four Years After the Great Recession:The Outlook for Emerging Economies
and Equity Markets in 2013
November 2012
George R. Hoguet, CFA, FRM
CMINST-####
The information contained in this document is current as of the date presented unless otherwise noted.
This presentation is solely directed at qualified investors within the meaning of the FINMA circular 2008/8.
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Summary
After slowing in 2012, growth in emerging markets is expected to accelerate to 5.4% in
2013, more than four times the estimate for developed markets
The outlook varies significantly by region with Asia, led by China and India, expected to
grow 6.6% and Central Europe 2%
Monetary policy in emerging markets remains accommodative and emerging markets
retain policy flexibility. However, economic activity in emerging markets is closely linked
to global trade, commodity prices, and financial conditions. A disorderly default/financialcrisis in the Eurozone will inevitably impact emerging markets.
Risks to global economic activity remain to the downside, but QE3 and OMTs have
placed a support on asset prices
At roughly 10 times 12 month earnings current emerging market valuations are not
demanding. Assuming a ten year average forward p/e of 10.7 current valuations
anticipate a further 7% in 2013 EM earnings downgrades. Flows to emerging assets ofall kinds are likely to accelerate and investors should continue to reduce the home bias.
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Background
The emerging markets in the global economy
Transmission mechanisms of the Global Financial Crisis to emerging markets:
Trade
Commodities
Capital Flows
The policy response and its aftermath
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The BRICs in 2013
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Major policy initiatives in China to be implemented in 20142015
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Sharp acceleration in Brazil. 1.4% to 4.1% in 2013. The Central Bank has cut rates by 525
basis points since July 2011.
Russia: Mid-East tensions and secular growth in oil demand support 3.5% growth in 2013 2013 CPI forecasts: China 3.1%; India 6.9%; Russia 6.4%; Brazil 5.3%
Source: JP Morgan, Morgan Stanley, SSgA estimates
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India
6.3%
What is an Emerging Market? What an Index Provider Says it is!
Mexico5.0%
Brazil
13.0%
South Africa
8.1%
Rest of
the World
17.6%
Taiwan
10.7%
China
17.8%
Russia
6.0%Korea
15.5%
Larger Markets Smaller Markets
Regional Weights Benchmark Weights
Asia 59.9%
Europe 9.7%
Latin America 22.0%
Mideast/Africa 8.4%
Country Weight Country Weight
Asia Europe
Indonesia 2.8% Czech Republic 0.3%
Malaysia 3.7 Hungary 0.3
Philippines 0.9 Poland 1.4
Thailand 2.2 Turkey 1.7
Latin America Mideast/Africa
Chile 2.0 Egypt 0.3
Colombia 1.3 Morocco 0.1
Peru 0.7
US $3.4 trillion in market capitalization 819 companies
21 countries
Roughly 13% of the MSCI All Country World Index
Source: MSCI via FactSet as of July 31, 2012. The MSCI EM Index is a trademark of MSCI Inc. Countriesand weights are as of the date indicated, are subject to change and should not be relied upon as current thereafter.
The BRICS Account for Roughly Half of the MSCI EM Index
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16Source: JP Morgan, Factset, Morgan StanleyData as of October 12, 2012
Earnings in Emerging Markets are Expected to Grow in DoubleDigits Next Year
Projected MSCI Earnings Growth Rates and Valuations 2013
Region NTM EPS FPE Yield ROE GDP
US 12.3% 12.9 2.2% 15.2% 2.1%
Europe 8.9 10.8 3.9 11.3 0.4
Japan 37.0 11.1 2.7 4.4 0.6
Emerging 17.0 10.2 2.9 13.6 5.1
M R i Th W ld S h h P f
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December 31, 1987December 31, 2011
December 31, 2001December 31, 2011
S&P 500MSCIWorld MSCI EM S&P 500
MSCIWorld MSCI EM
Annualized Return 8.04 5.48 11.04 -2.82 -1.65 7.82
Annualized Standard Deviation 19.17 17.14 26.59 17.77 17.36 23.31
Beta to MSCI World 1.00 1.00 1.18 1.00 1.00 1.16
Correlation to MSCI World 0.93 1.00 0.79 0.97 1.00 0.87
Sharpe Ratio 0.28 0.16 0.32 0.06 0.12 0.50
Sortino Ratio 0.53 0.26 0.50 0.08 0.17 0.69
Source: Style Advisor (Data in Swiss FrancsPast performance is not a guarantee of future results.Index returns are unmanaged and do not reflect the deduction of any fees or expenses.Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.
Mean Reversion Theory Would Suggest that the PerformanceDifference Between Emerging and Developed will Narrow
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2.1% 3.6% 6.5%
10.0%
11% 13%
31%
37%
50%
0%
10%
20%
30%
40%
50%
Insuranceallocation
Pension fundallocation
Currentinstitutional
allocation
Mutual fundallocation
Globall iquidity
MSCI AC-WIw eight
Globalmarket
capitalization
Nom in al GDP Gl ob algrowth
(2010-2020)
EM Share of World
As of end Aug 2010Source: CEIC, ERWIN, FactSet, IMF, MSCI, GS Global ECS Research estimates.
Emerging Markets Will Continue to Attract Institutional Flows
GLSTND-0567
37%
31%
13 %
49 %
44%
19%
59%
55 %
31 %
0%
10%
20%
30%
40%
50%
60%
70%
GDP M arket Cap M SCI World Wgt
EM Share of World
2010
2020E
2030E
2010 2020E 2030E
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China
'07 '08 '09 '10 '116
7
89
10
11
12
13
14
15
P
ercent
Source: China's National Bureau of Statistics
History as of Q2-12.
China's GDP Growth
China Real GDP, % chg y/y
China's CPI Inflation
'07 '08 '09 '10 '11 '12-4
-2
0
2
4
6
8
10
Percent
Source: China's National Bureau of Statistics
History as of Aug-12.
China CPI, % chg y/y
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%XWWKHUHLV6RPH'RXEW$ERXWWKH(FRQRP\V0RPHQWXPDQG3ROLF\PDNHUV5HVROYH
China
'07 '08 '09 '10 '11 '12-10
-5
0
510
15
20
25
30
Percent
Source: National Bureau of StatisticsHistory as of Aug-12.
China's Electricity Output
China Electricity Production, % chg y/y
'07 '08 '09 '10 '11 '1210121416182022
2426283032
Perc
ent
Source: People's Bank of ChinaHistory as of Aug-12.
China's Money Growth
China M2 Money Supply, % chg y/y
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Global Imbalances Are Slowly Falling
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
%O
F
G
Asia Ex-Japan Current Account Balance
Source: Morgan StanleyAs of September 2012
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As of December 2010
0306090
120150180210240270
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
China India Russia Brazil Japan US
No
.ofHouseholdsinMillions
And Domestic Demand is Growing Rapidly in the BRICS
Number of Households with Disposable Income Over $10,000
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Conclusion
The global recovery remains substandard and several risks remain: Europe, US fiscal
cliff, China policy mistake and Iran
Emerging economies remain closely linked to the global economy, but are increasingly
resilient. They are expected to grow 5.4% in 2013, but risks are to the downside.
The Great Recession has enhanced the secular case for investing in emerging markets
Valuations in emerging markets are not demanding by historic norms, but earnings
estimates are being revised downwards