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Emerging Markets Mid-Year Pulse Check
Some markets do appear to have a weak pulse right now, but any number of catalysts could act as a jump start. Global economic growth hasn’t been terribly inspiring so far in the first half of the year, but many investors have nevertheless been inspired to pour more assets into the equity markets, some of which have surged to record highs. As we hit the mid-year point, now seems like a good time to take a pulse check of emerging markets and assess our prognosis. About the Author At Franklin Templeton, we never lose sight of why we’re here: to provide investors with exceptional asset management. That’s why our independent, specialized management teams are at the heart of our business. These dedicated portfolio groups allow us to offer focused expertise across a broad range of strategies and asset classes. Several emerging and frontier markets—including the Philippines, Indonesia, Thailand and Vietnam in Southeast Asia—have seen strong returns in recent months. And there are several other notable emerging market performers where positive local macroeconomic developments have attracted strong investment flows. Given that yields on some assets seen as “safe” are close to record lows, the attraction to potentially higher-yielding, but riskier assets such as emerging-market equities has continued to grow. Of course, we’ve seen some disappointments too. Some larger emerging markets like South Africa, South Korea, Russia, China and Brazil have lost ground year-to-date through April. Reduced GDP growth forecasts certainly didn’t help and commodity-heavy markets took a double hit as reduced growth projections depressed commodity prices at the same time indications of rising production costs pressured individual mining and energy companies. In addition, sentiment in South Korea suffered amid threats from North Korea and fears Japan’s moves to depress the yen’s value would hurt South Korean exporters. In China, the authorities responded to rising property prices with measures to tighten monetary policy and restrict property purchases. In addition, some political and market developments in Brazil, India and Russia suggested that policy development was moving in a less shareholder-friendly direction. For example, in Brazil, the government has initiated major tax claims against some large companies. In my team’s opinion, many of these issues that held back the performance of major emerging markets in recent months are likely to have little long-term impact. Tensions on the Korean peninsula tend to fluctuate over time, and we believe an escalation of the current situation into actual conflict is highly unlikely. We also think yen weakness is unlikely to be a permanent drag on South Korean export performance. And, China’s moves to cool property markets should be seen in the context of strong ongoing growth and moves to rebalance the economy toward more sustainable growth models. Some policy moves that came with short-term costs could ultimately bring long-term benefits, such as anti-corruption measures that led to reduced demand for luxury items during the Chinese New Year. In Russia, shareholder rights issues are balanced by what we see as exceptionally cheap equity valuations. Meanwhile, the overall direction of policy in both India and Brazil remains market-oriented. Most importantly, we believe recent commodity weakness does not represent a long-term trend. The Case for Emerging Markets’ Growth Despite a recent moderation in short-term global GDP growth forecasts, we still anticipate a likely reacceleration of growth in 2013 and in subsequent years, with 2012 expected to mark a low point. Moreover, we expect growth generally in emerging markets in 2013 and beyond longer term to be much stronger than in developed markets and believe such strong growth could not only drive rising demand for commodities, but also feed into corporate profitability and valuations over time. Industrialization and urbanization in emerging markets are likely to further increase commodity demand, which could push prices ahead over the long term. In many emerging economies, commodities, exports and infrastructure development could continue to be leading growth drivers, but we believe going forward, overall growth is likely to arise increasingly from domestic sources. Expanding consumer wealth is creating an increasingly large and discriminating body of middle class consumers across emerging markets, and their demand is in turn creating increasingly significant domestic economic activity. Furthermore, emerging markets have far lower levels of consumer indebtedness than is common in developed markets, giving their consumers commensurately greater capacity to ramp up demand. In addition, demographic factors are more favorable in many emerging markets than in most developed markets. With a relatively high proportion of the population in emerging markets moving into the workforce and a relatively low proportion of dependents, demographics are acting to reinforce consumer demand. Even in markets like China, where demographics are less clearly favorable, productivity gains from moves out of agriculture and into manufacturing and service industries have still provided a positive influence on growth and domestic demand. Frontier Markets – Emerging Markets of the Future These so-called “emerging markets of the future” have enjoyed strong growth from low base effects, abundant natural and human resources, the availability of easy gains from market reforms and injections of technology into relatively low-wage economies. Compared with more mature emerging markets, frontier markets are relatively under-researched, and we believe that this lack of familiarity could lead to undervaluation and pricing anomalies that we could seek to exploit through our extensive research resources. We are finding many opportunities in frontier markets globally, but with an especially dense pack of opportunities, we think Africa in general represents an investment destination all its own and one we are eyeing with particular interest. We remain aware of risks to all markets, including emerging markets, arising from the fragility of global growth, indebtedness, and a number of geopolitical risks, notably in Korea, the South China Sea and the Middle East. However, while we take account of macroeconomic considerations as part of our investment process, our central aim is to build portfolios from those stocks our research leads us to believe are most underpriced relative to their long-term potential. My prognosis: Some markets do appear to have a weak pulse right now, but any number of catalysts could act as a jump start. Continue reading
These Farms Could Grow Your Wealth
Posted on June 10, 2013 by Juan Federico Fischer Uruguay has some of the most fertile soil in the world. The case for owning farmland as a strategy to safely grow or preserve your nest egg has never been stronger. Increasing populations and wealth in emerging economies is the primary driver. As people in these economies become richer, they eat more food. Drought (or too much rain) has caused havoc with harvests in major producers like Canada, the Ukraine and parts of Brazil in recent years. The countries producing food are restricting trade, as they fear shortages. Looking to the medium term, we can expect food prices to continue to trend up. And the best place to find productive farmland is Uruguay . With consistent appreciation and an annual cash return Uruguayan farmland is a great store of value in turbulent times. Nestling between Argentina, Brazil and the Atlantic Uruguay is peaceful, stable and has over 2.6 million acres of farmland under cultivation. Lying unused are more than 4 million acres suitable for cultivation. The land is mostly flat—perfect for the machinery needed. And water isn’t a problem. Much of the country sits on the world’s largest aquifer and rainfall is even and year-round. It’s easy to find good land. The country is among the most fertile in the world. Uruguay has non-degraded soil producing two crops a year and healthy grass-fed cattle. The country supplies 5% of global beef exports; it’s the 6th largest producer of soya beans…and the 4th biggest exporter of rice. The case gets stronger when you hear how free you are to sell your crops wherever and whenever you find a willing buyer. There are no export tariffs, or production quotas or other restrictions like there are in other parts of the world. There are also no limitations on what you—as a foreign buyer— can buy…and you are treated as a local under the law. It’s probably the easiest place for the individual farmland investor. It’s a passive, turnkey investment. You don’t need to know anything about farming. You can lease out the land for a cash rental paid up front, or you can hire a local farm management company that reports on operations directly to you. They’ll give you a business plan. Once you agree on that with them they will implement it on your behalf. The cost of land ranges from $900 to $5,000 per acre. If you buy land and lease it to a farmer you can expect a yield of around 4%. Go with a management company and you can expect a higher yield, perhaps around 6% to 8%. Here’s a recent example of what’s on offer: A farm in the western part of Uruguay near the colonial town of Colonia. This is where you’ll find some of the best land in Uruguay. It’s 120 acres and the price is $485,000—$4,041 an acre. Then there’s the appreciation potential farmland offers you. Over the last eight years, farmland has appreciated at an annual rate of above 15%. You can expect the appreciation to continue, at about 10% yearly. Continue reading
China’s Food Demand Grows
China’s food demand grows Dow Jones Newswires 05/30/2013 @ 10:37am China’s rising hunger is driving ever-larger acquisitions of global food assets as the shifting dietary profile of the world’s most populous nation increasingly puts meat, dairy and processed-food producers into play. Underscoring the trend, China’s Shuanghui International Holdings Ltd. on Wednesday said it agreed to acquire Smithfield Foods Inc. (SFD) of the U.S. for $4.7 billion, aiming to secure more pork for Chinese markets. The proposal is the largest in more than a decade of Chinese ventures to snap up food companies abroad. Other purchases have included state-owned Cofco Corp. buying Australian sugar producer Tully Sugar Ltd. last year for about $140 million, and Shanghai-based Bright Food (Group) Co.’s 2011 purchase of Manassen Foods Australia Pty. Ltd. for an estimated $522 million including debt. Bright Food said last year it would acquire control of U.K. cereal maker Weetabix Food Co. The purchases are part of a broader effort by Beijing to secure the raw materials needed to feed its fast-growing economy. Chinese state-controlled companies in recent years have struck big energy and mining deals. But many of the country’s food investments have had lower profiles. Shuanghui’s bid for Smithfield, the world’s largest hog farmer and pork processor, signals that not just any dish will do. As China grows more wealthy, relatively expensive protein is becoming a bigger portion of the domestic diet. China’s meat consumption would still need to rise about 8% from last year’s level just to catch up to South Korea’s, according to the United Nations’ Food and Agriculture Organization. “It is part of the broad Chinese strategy to invest the country’s current-account surplus into strategically important commodities. And going forward, more transnational acquisitions are possible in meat and dairy,” said Paul Deane, the senior agricultural economist at Australia & New Zealand Banking Group Ltd. (ANZBY, ANZ.AU, ANZ.NZ). Cofco Chairman Ning Gaoning told reporters in March that his company is seeking acquisitions and investment opportunities in more consumer brands in the U.S., Australia and Brazil, suggesting that as Chinese palates get more adventurous, the door will open for imports of more premium foods. Australia may be a favored destination given its resources, Mr. Deane said. Chinese investment in Australia and New Zealand food and agribusiness targets has totaled $1.1 billion since 1995, according to research firm Dealogic. Beef may be a prime target for Chinese buyers, said Rabobank analyst Chenjun Pan. Chinese beef consumption has been rising steadily, with domestic prices more than doubling since 2007, she said. The U.S. Department of Agriculture projected that China’s beef imports would rise to a record 175,000 metric tons this year. Industry data show that China imported about 61,000 tons last year. Milk and other dairy products would also make logical Chinese acquisitions, said Li Guoxiang, a researcher at the state-backed Rural Development Institute of the China Academy of Social Sciences. “If we only rely on domestic resources to develop the animal-husbandry industry, China’s grain production will face challenges, and there will be more serious environmental pollution problems,” Mr. Li said. Relying on foreign resources may also assuage government concerns about having enough food, he said. As rising wealth collides with a string of scandals over tainted food in China, prospective acquirers could also shop for premium processed foods abroad, including olive oil and meat and dairy products, such as cheese and yogurt, Ms. Pan said. “The domestic market can’t convince consumers of food safety, so there’s a lot of space for such acquisitions.” -David Winning in Sydney, Sameer Mohindru in Singapore and Zhoudong Shangguan in Beijing contributed to this article. Write to Chuin-Wei Yap at Chuin-Wei.Yap@dowjones.com Subscribe to WSJ: http://online.wsj.com?mod=djnwires (END) Dow Jones Newswires May 30, 2013 10:51 ET (14:51 GMT) Continue reading
