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Emerging Market Sell-Off Sets Scene For Long-Haul Returns
By Fiona Hamilton (Money Observer) | Fri, 23rd August 2013 Emerging market sell-off sets scene for long-haul returns Steep setbacks in a number of emerging and Asian stockmarkets have attracted the attention of global and regional investment company managers. Stockmarkets in the BRIC countries have been relatively disappointing for some time, but other emerging markets – in Mexico, Thailand and the Philippines, for example – had a fantastic run prior to the June sell-off. As a result, the shares of many consumer-oriented and higher-yielding companies reached levels that persuaded leading emerging market managers to take profits. They were well advised, as some of the most highly rated companies, such as Mexican restaurant group Alsea, have fallen by more than 30%, even though their businesses seem unlikely to be materially affected by macroeconomic events. Tense times If confidence continues to be undermined by fear that central banks will reduce quantitative easing in the West and credit conditions will tighten in China, emerging stockmarkets are likely to remain out of favour, as Western money tends to fly home when nerves are jangling. Riots in Brazil and Turkey have not helped, and nor have the Syrian bloodbath, the increasingly authoritarian tone of the Russian government, or a series of interventionist or confiscatory moves by Latin American leaders. Despite all this, the long-term outlook for many emerging market and Asian companies remains far more exciting than it is for their counterparts in the West, and investors who buy when the worst of the setback is over should be well rewarded. Mark Mobius has managed the £1.6 billion Templeton Emerging Markets Investment Trust (TEMIT) since its 1989 debut, and has achieved net asset value total returns averaging close to 20% a year over the past decade. He believes emerging markets continue to offer potential for superior long-term returns, primarily because their economies are, on average, growing much faster than developed economies. “We believe this growth has become increasingly self-sustaining, as levels of trade with emerging markets start to dominate overall trading patterns, and rising consumer wealth in emerging market economies stimulates domestic demand. The finances of emerging market countries as a group, as measured by factors such as foreign reserves and debt-to-GDP levels, appear stronger than those of many developed markets, while demographic factors in emerging nations today are also much more favourable,” he says. Matthew Dobbs, who has achieved highly competitive returns for Schroder Oriental Income and Schroder Asia Pacific, makes a similarly positive case for Asia, which dominates the emerging market indices, and particularly for the 10 countries that make up the ASEAN region. Dobbs says political conditions seem encouragingly stable in the key countries of Thailand, Indonesia and the Philippines, which have a combined population of around 400 million. Urbanisation is continuing to increase, which boosts productivity and growth, while intraregional trade is growing, helped by improved infrastructure. He believes the Asian economies have become much less vulnerable to problems in the West because most are now well financed, with sturdier current account balances, robust foreign exchange reserves and less US dollar-denominated debt. Although such positive fundamental measures were priced in before the June correction, he says valuations have started to look interesting again, especially in areas such as property development, banking and healthcare. Investor options Investors wanting to venture into emerging markets have a variety of options among closed-end investment companies. The most indirect choice would be a developed market trust holding a lot of companies exploiting emerging market opportunities, such as Jupiter European Opportunities or Henderson Smaller Companies. They invest in companies with higher levels of corporate governance, their liquidity tends to be better and it is easier to keep close tabs on what a company’s management is up to. They can get plenty of exposure to some sectors of emerging market demand – consumer goods, industrial equipment, tobacco, luxury goods, aerospace and pharmaceuticals, for example. However, investors will be unable to tap into many other sectors through Western companies, so their emerging market exposure will be partial. Also, Western companies are more comprehensively followed, so it becomes harder to spot valuation anomalies. Some trusts in global sectors offer a more direct but still flexible exposure. Murray International is the stand-out option. It has roughly half its portfolio invested in Asian and emerging market companies and boasts a fantastic long-term record. Its net asset value fell sharply in June. If this brings the premium down to earth, it could offer a buying opportunity. British Empire Securities & General has about a quarter of its portfolio in Asia, largely through well-managed conglomerates selling at deep discounts to their asset values. Scottish Mortgage Investment Trust has just under a quarter of its assets in emerging markets and Asia, but its high-conviction portfolio and high gearing means it is not for the fainthearted. Scottish Investment Trust reduced its emerging market and Asian exposure to around 22% before the setback, but lead manager John Kennedy is keen to rebuild it. Global emerging market trusts, such as TEMIT, JPMorgan Global Emerging Markets Income and JPMorgan Emerging Markets, require a more wholehearted commitment, as they cannot swing the balance elsewhere when times are tough. Regional specialists in Latin America, eastern Europe and Asia Pacific are even more circumscribed. Single-country trusts have a narrower selection of equities and nowhere to hide if their market falls out of favour, but they may offer deeper exposure. The portfolio of VinaCapital Vietnam Opportunity, for example, includes private equity and real estate as well as equities. Antony Bolton’s difficulties managing Fidelity China Special Situations Investment Trust have underscored the importance of picking specialist managers with a lot of relevant local knowledge and contacts. Schroders, Aberdeen and First State Stewart are all strong in Asia and emerging markets, and offer a variety of trusts and offshore funds. Green tinge First State’s Pacific Assets Trust is a carefully-run trust that does not use gearing and steers clear of overvalued consumer companies. It looks to buy quality companies on modest valuations, but manager David Gait is also committed to finding companies that directly or indirectly address the enormous sustainable development challenges confronting Asia, such as sourcing clean water. Fund Data Name 1 Year (%) 3 Years (%) 5 Years (%) Rating Brit Emp Sec&Gen Tst plc 15.43 22.41 22.41 2 star(s) Fidelity China Spec Sits Plc 29.28 -8.10 – 1 star(s) Henderson Sm Cos 63.29 120.63 140.59 3 star(s) JP Morgan Emg Mkts IT plc 2.30 7.20 37.16 4 star(s) JPM GblEM Inc Tst plc 5.53 22.69 – N/A star(s) Jupiter European Opps 41.59 105.52 147.07 5 star(s) Murray Intl Tst PLC 15.05 50.78 96.78 3 star(s) Pacific Assets Trust plc 25.94 50.16 74.00 3 star(s) Schroder Asia Pacific 6.22 29.59 83.20 4 star(s) Schroder Oriental Inc 14.57 51.20 133.58 4 star(s) Scottish Investment Trust PLC 24.38 51.30 42.71 3 star(s) Scottish Mortgage IT 32.45 67.64 72.15 3 star(s) Templeton Emerging Markets 1.31 4.56 47.98 3 star(s) VinaCapital Vietnam Opp 31.55 43.41 -11.99 Continue reading
Chinese Fragrance More Precious Than Gold
By Wang Jie ( Shanghai Daily ) 08:12, August 19, 2013 Many rich Chinese are buying luxury brands of famous designer perfumes, but the ultimate luxury fragrance — one far costly than gold — is agarwood or chen xiang (沉香), an ancient Oriental fragrance. Increasingly Chinese are rediscovering their appreciation for agarwood, which played a role as incense and oil in religious rituals throughout Asia and the Middle East. The deeply aromatic fragrance is considered an aid to meditation and was very popular in ancient China. Pieces of natural wood and fragrant carvings are sought by collectors. Incense and essential oil are precious. Whenever it is burned, heated or simply placed at room temperature, it gives off a pleasant aroma — from subtle to intense. What could be more luxurious than simply burning a piece of high-quality chen xiang that costs 10,000 yuan (US$1,629) per gram of highest quality and savoring the fragrance. And then it’s gone, up in smoke. But worth it, many people say. Arguably the most costly fragrance in the world is complex, layered and difficult to describe. It is sweet, rich and deep but balanced. It’s also called earthy, smoky and sweet — deeply pleasing. For most people, chen xiang (literally “wood with mellow fragrance”) is just a piece of rotten wood. It literally is rotten. Agarwood is a dark resinous heartwood that forms in aquilaria and gyrinops trees when they become infected with a particular fungus. Before infection, the heartwood is relative pale in color, but the tree produces a dark aromatic resin in response to the attack. It is this resinous wood that is valued in many cultures. The trees are large evergreens native to Southeast Asia, but most have been cut down and now trees are commercially raised and infected with fungus in a long process. The best and most expensive chen xiang is natural and old, and some areas produce better wood than others. Although commercial agarwood has an alluring fragrance, there’s nothing like the real thing. The cost is so high because trees in nature are scarce, and the commercial farming and processing is costly. Throughout the region, locals hunt for old wood and may happen upon buried pieces that they treat like gold. Trees grow in Vietnam, Thailand, Cambodia, Malaysia, Indonesia and India. Only very small amount is produced. For chen xiang collector Wang Yinan, this is the ultimate luxury, without parallel. “The reason is clear. If you buy a house, antique or jewelry, they remain as concrete items,” he says. “But chen xiang is different. It is burned for its fragrance, the fleeting moment of enjoyment. Nothing is left, but the fragrance, the temporary fragrance. Isn’t this the most luxurious thing on the world?” Wang, a famous TV host, is director of the National Chen Xiang Research Association. In ancient times, chen xiang could only be appreciated by imperial families and high-ranking nobles. It has been used in traditional Chinese medicine as a tonic, diuretic, stimulant and aphrodisiac. It was used to treat heart pain, stomach pain, fatigue, stress and anxiety. Today the price of a piece of high-quality chen xiang can reach several million yuan. At 10,000 yuan per gram, it is 35 times the price of gold which now costs 260 yuan per gram. Some is carved into artwork. As such, it’s coveted. “I always say that if you want to start collecting something, the best way is to study and learn,” Wang says. “Today the antiques field is chaotic, filled with traps and fakes and chen xiang is no exception — even worse. I would say that 90 percent of the chen xiang in the market is faked or artificially/commercially produced.” An educated nose is the best guide to authenticity, Wang says. “Because there is no physical way to judge the authenticity of real chen xiang, the only reliable tool is your nose,” he says. “I’m not opposed to commercially produced chen xiang, but the fragrance is a thousand miles away from original one, which could only be distinguished by the nose.” Wang once visited Vietnam to see how chen xiang is discovered. “It was a magical journey. Locals searched along the river and suddenly they spotted something in the mid. After washing and cleaning, it turned out to be chen xiang, an ordinary-looking piece of wood or enormous value,” he recalls. “I am enamored of chen xiang not only because of its profound fragrance but also because the fragrance envelops everyone, rich and poor, and it lingers. But when it’s burned, it’s gone, it’s a memory,” Wang says. Continue reading
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
