Emerging Markets Emerge Unevenly as Growth Slows
For all the talk about how emerging markets are going to rule the world, 2012 wasn't their year.
The biggest markets—China, Brazil and Russia—limped behind, as emerging markets overall drew even with their developed-market peers to which they are often compared, thanks to strong performances in markets such as Turkey and Thailand. The broad MSCI Emerging Markets Index, which measures performance in 21 countries, rose 15% in 2012, better than the 13% rise in the Standard & Poor's 500-stock index.
Hopes are brighter for 2013, as some investors expect economic growth to accelerate across emerging markets for the first time since 2010, giving an opportunity for companies to boost profits.
"Emerging-market investors have been chumps the last couple of years," said Morgan Harting, emerging-market multiasset portfolio manager for AllianceBernstein in New York, which has $426 billion under management.
Many investors presumed that because economic growth is faster in emerging markets than Europe and the U.S., stock markets in places like China and India would outperform. While headline growth there was better than the West, the rate of growth decelerated, pressuring company revenues as labor and commodities costs were rising.
This year augurs a change in the pattern, with the International Monetary Fund forecasting underlying growth in emerging markets to expand in 2013, to 5.5% from 5.3%.
"Just having moderate acceleration, if companies can contain costs, will have a big positive flow to the bottom line," Mr. Harting said.
Only one emerging-market index ended in the red in 2012: Chile's Santiago Stock Exchange IPSA Index dropped 11%. Russia's RTS index rose 11%. China's Shanghai Composite Index gained 3.2%.
Keeping a cap on emerging-market stocks was a slowdown in global trade. That hurt companies that export commodities from places like Brazil, Indonesia and Russia. It stymied manufacturing companies in China and Taiwan.
Meanwhile, countries with strong domestic demand and healthy banks, notably in Southeast Asia, excelled. Others like Turkey and India benefited from a what-goes-down-must-go-up situation, rebounding from crashes in 2011. Currencies also played a role. Indonesia's Jakarta Composite rose 14%, but because the rupiah slid against the dollar, foreign investors saw only half that gain.
The opposite effect happened in South Korea, where a strengthening won boosted a 9.4% rise in the Kospi index into a 17% gain for dollar-based investors. "It's a good environment for active investors," said Adrian Mowat, emerging-markets strategist for J.P. Morgan in Hong Kong, as smart stock pickers can now identify value in individual companies and countries. "This is a return to more normal conditions."
Looking ahead to 2013, a big question is whether last year's market darlings can repeat. Turkey's ISE National 100 Index rose 53%, and the Philippines's PSE Composite increased 33%, as both benefited from expectations that ratings firms could promote them into investment-grade status in 2013. An upgrade would signal fundamental improvements in economies and the ability of their companies to earn greater profits.
But with those rises came increased valuations, as investors bid up prices faster than companies are making money.
"Some of those markets may have gotten ahead of themselves and may be ripe for a pullback," said David Pinkerton, chief investment officer of Zurich-based Falcon Private Bank, which has $12 billion of assets under management. He is a long-term buyer of emerging-market stocks and bonds.
Thailand, which bounced back from widespread flooding that hammered its industrial base in 2011, saw the SET index surge 36%. It is the best-performing emerging market over the past three years, with an average annual return of 23%, according to MSCI.
India, the world's ninth-largest economy, saw its stock market rebound after a terrible 2011. The Bombay Stock Exchange's Sensex index rose 26%.
With a new finance minister in place, a government that has pushed through overhauls on attracting foreign investment, and inflation finally ebbing, the rally in India could continue.
Brazil's Bovespa index rose 7.4%, as slow growth and the sharp decline in global commodity prices hit the once-hot economy. Signs that China, Brazil's biggest trading partner, was picking up steam in the fourth quarter gave some hope that demand for Brazil's coal, iron ore and soybeans would come back in 2013.
Another bright spot for emerging markets: Bonds rallied as yield-hungry investors soaked up a substantial increase in new offerings. Governments in emerging markets issued a record of more than $80 billion in bonds in 2012, according to data provider Dealogic.
Global bond investors from asset managers, pension funds and wealthy private-bank clients supported the bond boom as they fled the near-zero interest-rate environment in the U.S., Europe and Japan. J.P. Morgan's EMBI+ index, which tracks emerging-market bonds, measured a total return of 18% in 2012. In comparison, the Barclays aggregate index of U.S. bonds returned about 4%.
In a sign of how the emerging-market bond world is maturing, Mongolia, Zambia and Bolivia issued sovereign bonds for the first time, receiving favorable terms. In December, mineral-rich Mongolia, which was rescued by the International Monetary Fund as recently as 2009, persuaded investors to part with their money for 10 years at an annual interest rate of 5.125%.
The low interest rates on possibly risky debt have some analysts and investors concerned the emerging-market bond trend is overplayed.
Others see room for emerging-market bonds to run.
"It is hard to make the case that valuations are overly stretched," said Andreas Kolbe, emerging-market credit strategist for Barclays in London. While the difference between interest rates among emerging-market bonds and Treasurys has narrowed, the spread is still more than a percentage point wider than their narrowest level, reached in June 2007.
The biggest markets—China, Brazil and Russia—limped behind, as emerging markets overall drew even with their developed-market peers to which they are often compared, thanks to strong performances in markets such as Turkey and Thailand. The broad MSCI Emerging Markets Index, which measures performance in 21 countries, rose 15% in 2012, better than the 13% rise in the Standard & Poor's 500-stock index.
Hopes are brighter for 2013, as some investors expect economic growth to accelerate across emerging markets for the first time since 2010, giving an opportunity for companies to boost profits.
"Emerging-market investors have been chumps the last couple of years," said Morgan Harting, emerging-market multiasset portfolio manager for AllianceBernstein in New York, which has $426 billion under management.
Many investors presumed that because economic growth is faster in emerging markets than Europe and the U.S., stock markets in places like China and India would outperform. While headline growth there was better than the West, the rate of growth decelerated, pressuring company revenues as labor and commodities costs were rising.
This year augurs a change in the pattern, with the International Monetary Fund forecasting underlying growth in emerging markets to expand in 2013, to 5.5% from 5.3%.
"Just having moderate acceleration, if companies can contain costs, will have a big positive flow to the bottom line," Mr. Harting said.
Only one emerging-market index ended in the red in 2012: Chile's Santiago Stock Exchange IPSA Index dropped 11%. Russia's RTS index rose 11%. China's Shanghai Composite Index gained 3.2%.
Keeping a cap on emerging-market stocks was a slowdown in global trade. That hurt companies that export commodities from places like Brazil, Indonesia and Russia. It stymied manufacturing companies in China and Taiwan.
Meanwhile, countries with strong domestic demand and healthy banks, notably in Southeast Asia, excelled. Others like Turkey and India benefited from a what-goes-down-must-go-up situation, rebounding from crashes in 2011. Currencies also played a role. Indonesia's Jakarta Composite rose 14%, but because the rupiah slid against the dollar, foreign investors saw only half that gain.
The opposite effect happened in South Korea, where a strengthening won boosted a 9.4% rise in the Kospi index into a 17% gain for dollar-based investors. "It's a good environment for active investors," said Adrian Mowat, emerging-markets strategist for J.P. Morgan in Hong Kong, as smart stock pickers can now identify value in individual companies and countries. "This is a return to more normal conditions."
Looking ahead to 2013, a big question is whether last year's market darlings can repeat. Turkey's ISE National 100 Index rose 53%, and the Philippines's PSE Composite increased 33%, as both benefited from expectations that ratings firms could promote them into investment-grade status in 2013. An upgrade would signal fundamental improvements in economies and the ability of their companies to earn greater profits.
But with those rises came increased valuations, as investors bid up prices faster than companies are making money.
"Some of those markets may have gotten ahead of themselves and may be ripe for a pullback," said David Pinkerton, chief investment officer of Zurich-based Falcon Private Bank, which has $12 billion of assets under management. He is a long-term buyer of emerging-market stocks and bonds.
Thailand, which bounced back from widespread flooding that hammered its industrial base in 2011, saw the SET index surge 36%. It is the best-performing emerging market over the past three years, with an average annual return of 23%, according to MSCI.
India, the world's ninth-largest economy, saw its stock market rebound after a terrible 2011. The Bombay Stock Exchange's Sensex index rose 26%.
With a new finance minister in place, a government that has pushed through overhauls on attracting foreign investment, and inflation finally ebbing, the rally in India could continue.
Brazil's Bovespa index rose 7.4%, as slow growth and the sharp decline in global commodity prices hit the once-hot economy. Signs that China, Brazil's biggest trading partner, was picking up steam in the fourth quarter gave some hope that demand for Brazil's coal, iron ore and soybeans would come back in 2013.
Another bright spot for emerging markets: Bonds rallied as yield-hungry investors soaked up a substantial increase in new offerings. Governments in emerging markets issued a record of more than $80 billion in bonds in 2012, according to data provider Dealogic.
Global bond investors from asset managers, pension funds and wealthy private-bank clients supported the bond boom as they fled the near-zero interest-rate environment in the U.S., Europe and Japan. J.P. Morgan's EMBI+ index, which tracks emerging-market bonds, measured a total return of 18% in 2012. In comparison, the Barclays aggregate index of U.S. bonds returned about 4%.
In a sign of how the emerging-market bond world is maturing, Mongolia, Zambia and Bolivia issued sovereign bonds for the first time, receiving favorable terms. In December, mineral-rich Mongolia, which was rescued by the International Monetary Fund as recently as 2009, persuaded investors to part with their money for 10 years at an annual interest rate of 5.125%.
The low interest rates on possibly risky debt have some analysts and investors concerned the emerging-market bond trend is overplayed.
Others see room for emerging-market bonds to run.
"It is hard to make the case that valuations are overly stretched," said Andreas Kolbe, emerging-market credit strategist for Barclays in London. While the difference between interest rates among emerging-market bonds and Treasurys has narrowed, the spread is still more than a percentage point wider than their narrowest level, reached in June 2007.
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