Even after gains, emerging markets are top picks
By Steven C. Johnson
NEW YORK (Reuters) – A growing middle class unburdened by the excessive debt plaguing Western consumers means emerging markets still offer plenty of opportunities to make money next year even after a meteoric rise in 2009.
Money managers at the Reuters Investment Outlook 2010 Summit this week were particularly bullish on Asian economies with high savings rates and on Brazil. Some said the maturity of Brazil’s financial markets means it almost has “emerged” and joined the ranks of more developed economies.
Bob Doll, vice chairman of Blackrock Inc , said the “absence of the debt noose around the neck that much of the developed world has” makes emerging economies promising places to invest, despite a 70 percent gain in the broad MSCI emerging markets index <.MSCIEF> in 2009.
Others highlighted a growing middle class, a high savings rate, commodities wealth and room for increased consumer spending as factors favoring emerging market exposure in 2010.
Economies with low levels of consumption as a percentage of gross domestic product such as Brazil and China “are economies that can grow and grow and grow,” said Bill Gross, co-chief investment officer at Pacific Investment Management Co., the world’s biggest bond fund.
In Brazil, “less than 20 percent of the population uses the financial service system,” said Diane Garnick, investment strategist at Invesco. “They don’t even have a bank account, so that in my mind creates a scenario where they are going to grow a lot faster.”
GIFT THAT KEEPS GIVING
Such enthusiasm is hardly new. In the darkest days of the financial crisis in 2008, investors dumped all emerging market assets and currencies with abandon and sought safety in short-dated U.S. Treasuries and cash.
But since March, emerging assets have been in high demand as investors began betting that the biggest emerging economies would lead a global recovery.
Brazil’s benchmark stock index, the Bovespa <.BVSP>, has gained nearly 80 percent this year and still has a 12-month forward price/earnings ratio below that of the S&P 500, according to Thomson Reuters data.
According to fund tracker EPFR Global, as of mid-November, emerging market equity funds had attracted a net inflow of $60 billion in 2009, shattering 2007’s record of $54.3 billion.
Metals and oil have also had a steady run higher, which along with high interest rates helped boost currencies of commodity-rich countries such as Brazil, South Africa, Chile and others.
Of course, while high savings, low debt and mature debt markets have certainly helped burnish emerging markets’ appeal, all the easy money the Federal Reserve and other developed central banks have poured into the economy hasn’t hurt either.
“I view those flows as speculative,” said veteran Wall Street economist Henry Kaufman. “You will notice that when there is a period of tightening credit conditions those emerging countries do very poorly.”
CAPITAL CONTROLS vs EASY MONEY
Tighter conditions may still be quite a ways off, though, according to most money managers at the summit. Gross said sluggish U.S. growth means the Fed likely won’t hike rates from record lows near zero percent until 2011. Few expected imminent hikes in the euro zone or Japan, either.
Not all emerging markets are of equal appeal, either. Jim Rogers, who rose to fame after co-founding the Quantum Fund with George Soros nearly four decades ago, said he likes Brazil and fiscally prudent countries such as China but dislikes India because the bureaucracy is stifling.
He also said he avoids Russia because investors can end up “broke and dead.”
Punitive taxes and other capital controls designed to slow “hot money” inflows are also a risk and are looming larger on investors radar screens after Brazil slapped a 2 percent tax on foreign equity and fixed-income purchases last month.
Brazil said the economy grew 1.3 percent in the third quarter this year, below a 2 percent forecast, and some economists have blamed the strong real, up about 24 percent against the dollar this year.
Taiwan and Korea have adopted similar measures and many emerging central banks have intervened to weaken their currencies relative to the dollar.
A strong currency can increase the cost of exports, which many emerging economies rely on to drive growth.
“Capital controls are points of pretty significant concern,” said Max Darnell, chief investment officer of First Quadrant, with $18 billion in assets under management. “Impediments to trade in these markets is very worrisome to me.”
Still, Darnell said First Quadrant plans to open a fund that invests in emerging market currencies and is particularly bullish on Brazil’s real.
Jonathan Xiong, who helps manage about $18 billion in currency assets at Mellon Capital Management, said the impact of recent capital controls should be short-lived.
“I think a lot of these investors who are investing in emerging markets — hopefully they realize some of the risks — are in for the longer-term play,” he said.
(For summit blog: blogs.reuters.com/summits/)
(Additional reporting by Daniel Bases, Herb Lash, Jennifer Ablan, Wanfeng Zhou and John Parry; Editing by Leslie Adler)
Barclays Wealth gives recipes for Asia exposure
Manuela Badawy and Walter Brandimarte
Thu Dec 10, 2009 4:09pm EST
NEW YORK (Reuters) – A “fusion portfolio” with Western ingredients and Asian techniques is among Barclays Wealth’s favorite recipes for investing in fast-growing Asian economies.
The money management firm, with $221 billion in assets, advises its affluent clients to have “substantial exposure” to the economic growth of Asia excluding Japan — which it forecasts to remain the most dynamic region for “years to come.”
In the first half of this year, all clients had to do was buy an exchange-traded fund indexed to Asian equities, said Aaron Gurwitz, managing director and head of investment strategy at the firm.
But now that regional stock indexes such as the Shanghai Composite .SSEC have rallied nearly 80 percent so far this year, more complex strategies are required.
“Now you have to find other ways, be more selective,” Gurwitz said on Thursday at the Reuters Investment Summit in New York.
He recommends investors seek active fund managers to map opportunities still remaining in Asia or indirect forms of exposure to the region.
And he gives one recipe of his own — the Asian Fusion Portfolio:
– Look at the list of recommended stocks by Barclays Capital, those with a “buy” rating, and that belong to a sector with at least “neutral” rating;
– Rank those companies by a portion of their revenues generated in Asia ex-Japan;
– Cut the list off at 50 percent.
“That gave us a list of 11 companies that we like for lots of reasons and also give you exposure to non-Japan Asia,” Gurwitz said.
He did not want to name specific companies, but said they are mostly technology and infrastructure suppliers.
“Everybody has a mental checklist that they use when deciding whether to make a particular investment — what is the valuation, yield, liquidity, market share,” Gurwitz said.
“I want to add a question: Does this investment give me exposure to economic growth in Asia?”
Brazil gets a lot of “yes checks” on Gurwitz’s expanded checklist, for its sound macroeconomic policies, high interest rates, central bank practical independency, and exports to Asia.
“Interestingly, the Brazilian and the Chinese economy fit like two pieces of the same puzzle,” he said, recommending investors focus especially on local-currency government bonds.
A diversified commodities portfolio is another favorite investment at Barclays Wealth not only because it provides exposure to Asia, but also because commodities “have not done so well as they should in the early stages of the recovery.”
Barclays Wealth sees commodity and stock prices being able to keep rising because it sees benchmark interest rates remaining at historic lows for a very long period.
Gurwitz is not worried about potential bubbles resulting from an extended period of low interest rates.
“The thing that concerns me about all the liquidity that has been created, particularly in the developed countries, it’s that it’s sitting as excess reserves in central banks, it’s not being used to generate economic growth or job creation,” he said.
“Before I start worrying about bubbles I have to stop worrying about the fact that the banks aren’t lending the money to anybody.”
Still, Gurwitz said he would love to figure out where the next bubble will be to profit from it before it bursts. (For summit blog: blogs.reuters.com/summits/) (Editing by Leslie Adler)