Transcript The Importance of Emerging Markets to Global

2007 to 2014 : Emerging Markets Importance to Global GDP Growth
Chris Taylor, Investment Director & Head of Research
Neptune Investment Management
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Why Investors Must Think Global
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World is now multi-polar & growth is driven by inter & intra regional trade
− Major trade flows: BRIC to neighbours; BRIC to BRIC; BRIC to OECD
•
Global industry leaders now found anywhere in the world
− Reflects structural shift in supply chains & manufacturing to cheapest locations
•
Historically & currently non-OECD vs. OECD economies differ e.g. consumer = c.40% vs. c.70%
− Exposure to both allows better risk management and portfolio diversification
The Global Economy Has Evolved
Source: Neptune Economics
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Why Emerging Markets?
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Emerging economies continue to drive global growth
– Changing global economic balance of power → wealth transfer to EM
– Increasing importance of trade between emerging market blocs
– Low household debt, strong corporate balance sheets, stronger fiscal positions
•
Ongoing structural shifts in emerging markets → driving growth forward
– Population effects → demographic dividend
– Infrastructure demand → to meet growth and replace obsolete equipment
– Power investment → critical to facilitate ongoing economic growth
– Rise of the consumer → growth of the middle class and increasing income
– Resource intensive → convergence of resource intensity per capita
The Long-Term Case for Investing in Emerging Markets Remains Intact
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The Global Environment
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BRICs have critical mass & economic momentum
– Differ in economic structure from OECD countries
– Low financial risk = less debt, more equity & structurally lower inflation
– Companies and economies more open & better managed than previously
•
What is the best approach?
– Global sector based research essential to identify future sector & stock opportunities
– Blend global equity and other asset classes to match risk appetite
– Efficient diversification = concentrated portfolios
Go ‘Global Unconstrained’ to Improve Diversification & Investment Returns
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Global Demand – The Shifting Balance
Comparative proportion of global GDP*
1995
2008
Advanced economies
82%
69%
Emerging and developing economies
18%
31%
United States
25%
23%
BRICs
7%
14%
The balance of global activity is shifting visibly to the naked eye
Source: *at market exchange rates, IMF
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Real Global Growth Forecasts (%)
2004
2005
2006
2007
2008
2009e
2010e
US
4.2
3.5
3.3
2.2
1.5
-2.0
1.8
Japan
2.3
2.6
2.2
2.1
0.8
-5.0
1.2
Eurozone
1.8
1.4
2.8
2.6
1.1
-3.5
1.0
UK
3.2
1.8
2.8
3.1
1.0
-3.5
1.5
Brazil
4.7
1.4
3.7
5.4
5.2
1.0
4.5
Russia
7.2
6.4
6.7
8.1
7.5
-8.5
3.8
India
7.0
7.5
9.2
9.2
7.5
5.0
6.5
China
9.5
9.9
10.7
11.4
9.8
8.0
10.0
Period
Economic forecasts point to emerging economies for growth potential
Source: Neptune Economics Team, September 2009
Please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this document is deemed to
be impartial research. We do not undertake to advise you as to any change of our views.
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Global GDP Forecasts - Methodology & Objectives
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Discover assumptions behind IMF WEO April 2009 forecasts
•
Based on GDP/components data : UN statistics division 1970-2007
•
Calculated historic compound growth rates (CGRs) over 80s; 90; 00s
•
Then forecast Real & Nominal $bn GDP figures 2008-2014
•
Fine tuned country forecasts using Neptune predictions
•
Identify future distribution of Global GDP growth
•
Assumed Emerging Markets = those outside of the OECD
•
Carried out on National, Regional & Global, and Supply & Demand Basis
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Preliminary Findings
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Focused on nominal $ figures – best proxy for corporate revenues
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Supply side $bn national GDP generally bigger than Demand $bn value
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2007 base year, some rounding errors, other activities = services
•
Absolute closest fit to IMF forecasts to 2014
– Neptune forecasts (US, UK, Japan, France, Germany, BRICs)
– Other OECD countries included at half their historic CGRs
– Other non-BRIC, non-OECD countries flat in 2009; historic rates 2010 onwards
•
2008-2010 assumptions have the biggest impact on estimated GDP growth
•
Neptune forecasts lower OECD consumption but are more optimistic on BRIC growth
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Global GDP – Demand Side 2007 vs. 2014
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Global GDP grows $24 trillion to $30trillion
•
64% developing vs. 36% developed
•
$15tn to $22tn demand from developing nations
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$8tn+ from developed countries
•
Growth rate of developing nations double that of
developed ones
•
By 2014 export/import values same
•
By 2014 Gross Fixed Capital same
Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this
document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.
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Global GDP – Supply Side 2007 vs. 2014
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Same pattern as demand side
•
Developing growth rate 5x developed
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Agriculture & manufacturing $bn increment
4x developed country $bn
•
Incremental manufacturing $6 trillion
developing vs. $1 trillion developed
•
Implies that, sector by sector, the greatest
growth potential exists in developing nations
•
Neptune global sector research confirms this
Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this
document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.
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USA vs. China – Demand Side 2007 vs. 2014
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China more important than the USA
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China $3.2tn to $3.7tn+ incremental demand
vs. USA $2.3tn to $2.3tnonly
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China’s growth 5x US sectors
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China consumption increment $2.16tn vs. US
at $1.89tn
•
US consumption 2007 $12tn; China $1.69tn
•
2014 China Gross Capital Formation bigger
than the US
•
2014 China’s exports trade bigger than the
USA
Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this
document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.
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USA vs. China – Supply Side - 2007 v 2014
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China more important than USA
•
2014 China manufacturing will be larger than
the USA, $4.12tn v $2.0tn
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China’s manufacturing increment 4x USA
($1.4tn vs. $0.16tn)
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China’s construction is double the $ value
increase of the USA
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Wholesale trade increment is the same but US
almost 4x larger in 2007
•
Same with Other Activities (Services) but US
10x larger than China in 2007
Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this
document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.
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Financial Factors – Less Risk
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BRIC countries grow at 5% to 10% p.a.
– Mostly real, some inflation
•
•
Now better financed: equity/debt/FX reserves
2000 – 2005 (% of GDP)
China
40%
Brazil
19%
Russia
18%
Emerging markets debt to GNP % ratio (1998 vs. 2007)
– Overall fell 39% to 31%
– Domestic up 20% to 23%
– Foreign down 19% to 8%
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Gross Fixed Asset Formation
Paid down debt using current account surpluses
Reduction in Foreign / US$
Denominated Debt 1998 vs 2007
Argentina
$100bn ↓ $30bn
Nigeria
$40bn ↓ $0bn
Russia
$40bn ↓ $12bn
Source: FT, EIU, JPMorgan
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Foreign Exchange Reserves vs. GDP
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Huge transfer of wealth to Asia and
commodity exports
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Non-OECD expansion driven more by equity
than debt
•
•
Foreign exchange reserves fund
infrastructure improvement
Latter will underwrite continued economic
expansion by debottlenecking the economy,
restraining inflation and raising employment
Country
Foreign
Exchange
Reserve*
2008
GDP
(US$)**
Reserve
as % of
GDP
China
$1,946bn
$4,222bn
51.4%
Russia
$427bn
$1,757bn
24.3%
India
$255bn
$1,237bn
20.6%
Brazil
$193bn
$1,665bn
11.6%
EU
$534bn
$18,930bn
2.9%
USA
$78bn
$14,330bn
0.54%
UK
$65bn
$2,787bn
2.33%
Source: *Time Series Data, (Jan 09) **CIA World Factbook (Jan 09)
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Emerging Economies: Structurally Sound – Low Inflation
Old risk = high & volatile inflation of
20% to 40%
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Reflected poor economic &
corporate management (lower
ROE)
Emerging Economies Consumer Prices (annual % change)
120
105.6
100.0
100
77.4
80
•
Added to investment risk &
undermined REAL returns
Since 1998, inflation sustained drop of
6% to 8%
•
Driven by structural
improvements in economy,
companies & capital markets
67.1
60.9
60
53.4
44.8
40
24.4
20.3
22.7
25.8
30.3
29.929.9
34.3
24.3
20
17.9
11.5 11.210.2
7.0 6.5 5.7 5.7 5.4 5.2 5.1 5.9 5.3
0
1980 1982 1984 1986 1988 1990 1992
1994 1996 1998 2000 2002 2004 2006 2008
Source: IMF World Economic Outlook Database classification of emerging and developing countries and Neptune Economics (Jan 09)
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Global Stockmarket Comparisons
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•
•
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YtY % EPS growth
Equally weighted
calculations used as at
Sept 2009
Highest EPS growth
outside OECD
Return on Equity
(ROE) nearer OECD
P/E ratios nearer
OECD
P/E Ratio
Yield
ROE
2009/08
2010/09
2011/10
2009/08
2009/08
2009/08
FTSE All-Share
-8.3
23.3
23.3
14.3
4.8
17.8
S&P Comp
-13.9
29.6
30.0
17.4
2.2
13.5
DJ EuroStoxx 600
-13.2
27.9
28.3
15.6
3.7
12.0
Topix
10.4
35.3
24.2
13.4
2.5
5.5
RTS $ 50
-22.9
37.8
25.3
12.9
4.6
9.4
Bombay SE 100
26.5
21.5
22.9
17.8
1.9
15.9
HK China H shs
24.4
36.2
27.5
19.2
3.8
9.5
Brazil
24.8
19.5
16.9
14.4
-
17.7
Source: Neptune Economics; please remember that forecasts are not a reliable indicator of future performance. The forecasts are Neptune’s personal views and as such this
document is deemed to be impartial research. We do not undertake to advise you as to a change of our views.
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MSCI World vs. Emerging Markets Sector Returns
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•
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Indicative benchmark =
112%+ cumulative growth in
UK retirement inflation*
MSCI Sectors: 2000 – 2009
Cumulative £ returns**
(%)
All
Countries
(%)
World
(%)
Emerging
Markets
(%)
All Industry
5.14
-1.00
143.13
Consumer Discretionary
-16.88
-20.45
148.91
Consumer Staples
82.82
80.00
212.71
Energy
144.55
129.02
355.61
Financials
13.75
5.51
182.71
Healthcare
31.73
30.28
196.24
Industrials
22.38
18.43
100.74
IT
-56.20
-59.07
4.58
Materials
134.74
110.33
333.03
Telecoms
-39.08
-47.84
72.82
Utilities
100.41
95.50
222.46
7/10 Emerging Markets
sectors outperformed
benchmark
1 World sector outperformed
benchmark; 3/10 lost money
Source: *Neptune Research Jan 2000-Sept 2009; **Lipper as at 30.09.09
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Take A ‘Global Unconstrained’ Approach
• Global sector research and the understanding of the macro environment is
essential to identify future sector and stock opportunities in any stockmarket
• Exposure to both Non-OECD and OECD economies allows better risk management
• High conviction, concentrated portfolios of c. 50 stocks that best represent the
views of the Neptune research process
Go ‘Global Unconstrained’ to Improve Diversification and Investment Return Potential
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Neptune’s Investment Strategy
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Keep portfolio focused on global sector leaders irrespective of country of origin
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Neptune research process entirely dedicated to identifying such stocks
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Global unconstrained approach to fully exploit investment opportunities across the globe
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Appendices
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Introduction to Neptune Investment Management
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Neptune was founded in May 2002
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Nearly 80% of the company held by directors & employees
•
•

Strong cash reserves (no debt)

Significant investors in our own funds
One of the top selling equity Fund Managers in the UK
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Current funds under management nearly £4.5 billion

Global Equity Fund over £860 million

Additional £180 million in segregated global equity mandates including one Local Authority
Award winning company based in single office in Hammersmith, London

Institutional team of 4 led by Alistair Wilson
Company Structure Has Helped Bring Our Success
Source: Neptune as at 30.09.2009 A Accumulation share class cumulative performance, in sterling with net income reinvested and no initial charges. The
performance of other share classes may differ. Past performance should not be seen as a guide to future performance. The value of an investment and any income
from it can fall as well as rise as a result of market and currency fluctuation and you may not get back the amount originally invested. This is intended for Professional
Clients and Eligible Counterparties. Persons who do not fall within these categories must not act or rely on the contents of this document.
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Important Information
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Some information and statistical data herein has been obtained from sources we believe to be reliable but in no way are warranted by us as to their accuracy or
completeness. These are the analyst’s personal recommendations and as such this document is deemed to be impartial research. We do not undertake to advise
you as to any change of our views. This is not a solicitation or an offer to buy or sell. Neptune Investment Management Limited has produced this report for private
circulation to Professional and Eligible Counterparties only. The material is not intended for the use of Retail Clients. All information and advice is given in good faith
but without any warranty.
Please remember that past performance should not be seen as a guide of future performance. The value of an investment and any income from it can fall as well as
rise as a result of market and currency fluctuations and you may not get back the amount originally invested.
Any past performance data that has not been shown is due to the information not being available. Neptune is not authorised to give investment advice and only
provides information on Neptune products.
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