FLASH EXPERTISE Emerging Equities Emerging equities clearly outperformed developed market equities in 2009. What is the outlook for 2010? Emerging equities greatly outperformed the equity markets of the developed countries in 2009. The MSCI Emerging Markets index achieved a performance (in euros) of 73.1% in 2009, compared to 26.7% for the MSCI World and 28.7% for the MSCI EMU(1). The outperformance is clear. It reflects the emerging economiesâ€™ great resilience in the face of the crisis and is explained particularly by solid economic fundamentals. But what is the outlook for 2010? The Emerging Equity specialists at Natixis Global Asset Management are confident: these countries still have high growth potential and their equity market valuations remain attractive.
The lessons of 2009 2009 provided a wealth of lessons for the emerging equities asset class. n The emerging markets came through the crisis better and have emerged strengthened The emerging markets have recovered particularly well from the effects of the crisis. The major emerging markets (such as Brazil and Taiwan) have almost all returned to their pre-crisis levels of industrial production. That is far from the case in the United States and the eurozone, where post-crisis levels, although stabilized, are markedly lower.
Industrial production (30/06/2007 - 26/11/2009, indexed to 100)
Source: Factset - December 2009
The recession in the emerging markets was also short-lived and above all smaller in scale than in the developed markets. GDP growth forecasts for next year again show a strong acceleration compared to this year. The negative impact of the crisis on economic growth potential will therefore probably be far smaller than in the industrialized countries.
GDP Growth and forecast (in %)
Source: Source JP Morgan - December 2009
(1) The figures mentioned refer to previous years. Past performance does not guarantee future results.
FLASH EXPERTISE / Emerging Equities / February 2010
n Economies whose fundamentals have never been as solid The structural changes that have Emerging countries and developed countries: current account balance (in % of GDP) taken place over the past decade have greatly improved the emerging marketsâ€™ economic fundamentals, which are now more solid than ever. The emerging markets are nowadays less dependent on capital flows from the developed markets thanks to their current account surpluses. China, for example, holds around one-third of the worldâ€™s foreign exchange reSource: IMF, december 2009 serves and has become one of the United Statesâ€™ biggest creditors. Experience of past crises has prompted the emerging markets to take a more rigorous approach to their fiscal management. Consequently, the emerging markets are now in a healthier financial state than the industrialized countries, due to better management of economic balances. Whereas imbalances in public finances have worsened steadily in the developed markets, the emerging markets have improving public finances.
Emerging countries and developed countries: general government gross debt (in % of GDP)
Source: IMF, december 2009
n The emerging markets remain attractive despite the strong rise recorded in 2009 The emerging markets have already been able to reverse the declines since the Lehman Brothers bankruptcy. Moreover, they have outperformed the developed markets by almost 20%(2) since the start of the crisis. Yet despite this strong rise they do not look overpriced. They remain almost 20% cheaper than the developed markets in terms of P/E ratio(2). Given that their earnings growth is expected to outstrip that of the developed markets, and in view of the structural changes that have occurred since the Asian crisis, the emerging markets no longer merit a steep discount to the developed markets.
Price earning ratio linked with the estimate profits for the next 12 months
(2) The P/E (price-to-earnings) ratio of a share is the ratio of the price of a share to the earnings per share. It is also known as the earnings capitalization multiple. It depends essentially on three factors: the future growth in the earnings of the company concerned, the risk associated with these forecasts and the level of interest rates.
FLASH EXPERTISE / Emerging Equities / February 2010
The outlooks for 2010 Our specialists are optimistic with regard to 2010. All regions seem in a position to generate positive growth, from which the equity markets should benefit. n The emerging region as a whole Despite the strong advances seen in the emerging equity markets in 2009, the equities investment team specialized on emerging markets expects the upward trend to continue in 2010 thanks to: • high growth rates in the emerging markets underpinned by strong domestic growth and the recovery in global trade; • valuations remaining attractive due to favorable expectations with regard to corporate earnings growth; • potential for the emerging currencies to appreciate against the euro; • fiscal balances showing much less deterioration than in the developed markets. The diversity of economic and political situations will probably lead to strong differences in performance among the countries in the asset class. Some countries are set to hold elections this year, which may cause some disruption. Finally, our specialists believe that the recovery in international trade and the return of the inflation theme will have very different impacts and responses among the various economies and national authorities. Country selection will therefore remain a key performance factor in this asset class. • On the basis of a recovery in growth in the United States, our specialists currently favor Mexico, as this country will be the first beneficiary. Its currency is also greatly undervalued. • In Asia, Taiwan and Korea appear particularly well positioned given their capacity to harness the vitality of global growth. These two countries, which are wide open to international trade, will continue to benefit from buoyant activity in China while taking advantage of the economic recovery in the developed markets. The team also expects the Asian currencies to appreciate against the euro. n Emerging Europe The European emerging markets are trading at a steep discount (30%) to the “mature” markets, whereas their earnings growth is expected to turn out higher. Investors’ appetite for these markets may remain high in the first half of the year, continuing the trend from 2009. Our specialists expect the equity markets to stabilize in the second half. The perception of the macroeconomic environment in the second half remains hazy, with many sources of uncertainty (ending of stimulus packages, pace of recovery, interest rate hikes). Our teams therefore expect the European emerging markets to continue rising in the first half of the year, with GDP growth expected to exceed 2% from 2010 in many countries. 2010 is likely to favor a management approach featuring a discriminating geographic allocation and high selectivity in the choice of stocks (bias towards quality stocks, which were abandoned in 2009). The trend in the European emerging markets in the second half will depend on the trend in the overall macroeconomic environment. This volatile asset class may conceivably be the subject of profit-taking. n Emerging Asia Our specialists are expecting a continued easing of US monetary policy and a weaker US dollar. They believe 2009 demonstrated the resilience of Chinese growth, and the fund’s managers are very confident with regard to the country’s performance in 2010. Even though the impact of the stimulus packages is fading, Chinese growth is very strong. We are therefore currently overexposed to “Greater China” and in particular have a strong conviction with regard to Taiwan. n Emerging Latin America The emerging markets of Latin America are expected to remain strong, unless global growth stalls. Our specialists favor four major themes: - the middle class domestic consumption, which is still growing apace and the forecasts for which are excellent thanks to the penetration of credit; - the infrastructure construction across the entire region; - the natural resources, including base metals, precious metals and agricultural products; - the increased access to property, powering stocks related to real estate, constitutes the fourth theme.
FLASH EXPERTISE / Emerging Equities / February 2010
Focal points In 2010, we will pay particular attention to the inflation risks and the impact of monetary policy changes in the emerging markets. n Change in monetary policy in the emerging markets For example, after implementing a dynamic stimulus package and major fiscal stimuli, the Chinese central bank is beginning to tighten its policy by raising its reserve requirements. This change in Chinese policy, which is clearly justified by the growth level attained, may have a negative impact on the equity markets in the short term. Over a longer-term horizon, this measure nevertheless seems to be an appropriate way to reduce the risk of bubbles forming in the asset markets. n Inflation fears Another focal point concerns inflation fears. Farm prices in India are beginning to rise again due to the impact of the bad monsoon. This could potentially affect middle class purchasing power and hence the strength of domestic growth. Inflation nevertheless remains under control at present. Consequently, despite an inflationary environment and the prospect of less favorable monetary policy, our investment teams remain confident in the emerging markets’ ability to manage this situation without losing their growth potential.
The advantage of our multi-boutiques model; specialized investment teams
Natixis Global Asset Management has developed an original multi-boutique model, the main advantages of which are the wide diversity of our products and the independence of the investment strategies offered by our various entities. With regard to emerging equity management, our combined expertise covers all geographic regions: Latin America, Asia, Europe and the emerging markets as a whole. Lipper Ranking Regular performance over 3 years(3) / category
Natixis Asset Management
Natixis Emerging Europe Fund
Absolute Asia Asset Management
Absolute Asia AM Emerging Asia Fund
Hansberger Global Investors, Ltd
Hansberger Emerging Latin America Fund
Natixis Asset Management
Natixis Actions Global Emergents
Leader / Equity Emerging Markets Europe (4)
/ Equity Emerging Markets Far East
Leader / Equity Emerging Markets Latin America (4)
/ Equity Emerging Markets Global
Benchmark MSCI Emerging EUROPE (PI $) (indicative only) MSCI Emerging Markets ASIA Free (DNR $) MSCI Emerging Markets LATIN AMERICA (PI $) MSCI Emerging Markets (DNR € )
Written on 22/01/2010 (3) The rating Lipper “Regular Performance” reflects the performance of a fund with a history of 3 years, adjusted by the short-term and long-term risk, with regard to all the funds of the same category Lipper. A noted fund "Leader" means that he is a part of better 20 % of his category and corresponds to the maximum rating 5, the least good funds being a contrario noted 1. (4) Non-available rating: the funds has not more than 3 years of history.
Disclaimer This document is intended for professional clients. It may not be used for any purpose other than that for which it was intended and may not be reproduced, disseminated or disclosed to third parties, whether in part on in whole without prior authorization in writing from Natixis Asset Management. No information contained in this document may be interpreted as being contractual in any way. This document is produced purely for informational purposes. It is a presentation created and prepared by Natixis Asset Management based on sources considered to be reliable. Natixis Asset Management reserves the right to change the information in this document at any time without notice, and in particular anything relating to the description of the investment process, which under no circumstances constitutes a commitment from Natixis Asset Management. Natixis Asset Management will not be held liable for any decision taken or not taken on the basis of the information in this document, nor for any use that a third party might make of the information. The Funds are authorized for sale in France and possibly in other countries where the sale is not contrary to local legislation. Prior to any investment, investors must check that they are legally authorized to invest in a Fund. The risks and fees connected to investment in a Fund are described in the relevant prospectus. The prospectus and periodic documents are available from Natixis Asset Management upon request. The prospectus must be given to the investor prior to the subscription.