Will emerging markets be 2011’s great bubble?

INVESTING
Will emerging markets be 2011’s great bubble?

SUJATA RAO
LONDON— Reuters
Published Friday, Dec. 17, 2010 10:01AM EST
Last updated Wednesday, Dec. 22, 2010 5:50PM EST


Emerging markets, the consensus trade for 2011, look set for further heavy inflows of investment dollars, raising questions over how much more new money they can comfortably absorb without igniting an asset bubble.

Most fund managers at a recent Reuters summit picked emerging markets as a top bet for next year, citing double-digit returns, underpinned by rising incomes and fast economic growth.

Equity portfolio flows to emerging markets are set to reach $186-billion (U.S.) this year, and, while they are seen falling a touch to $143-billion next year, according to the Institute for International Finance (IIF), they will still be more than double the $62-billion annual average seen between 2005 and 2009.

Yet, some are starting to ask if investors are getting carried away. Not only do unbridled portfolio flows risk inflating sector valuations into bubble territory, but the flows may be based on unrealistic expectations of long-term returns.

“The bigger bubble risk is the investor expectation of EM, there’s such euphoria,” said Mark Donovan, chief executive officer of Robeco, which manages €146-billion ($194.3-billion). “I’m always wary of these herd moves into certain asset classes, generally they are not well-timed.”

SWEET SPOT HIDES BITTER TRUTH

Mr. Donovan does not question the underlying emerging markets growth story. But he and some others believe new investors may be ignoring potential problems, within and outside the sector.

Emerging markets have been in a sweet spot this past year or two as liquidity unleashed by Western central banks has pumped up the market, fuelling double-digit returns.

A Reuters poll forecasts emerging returns will far outstrip U.S. and UK equity gains in 2011. Excess liquidity, however, is fuelling inflation in developing economies, potentially leading to overheating. Higher U.S. Treasury yields could also become a headwind.

“My central scenario is that in 2011 emerging markets will be okay. Given where valuations are you will still get a positive absolute return,” said John-Paul Smith, chief emerging markets strategist at Deutsche Bank in London.

“But some of the outsize returns forecasts are probably way too high ... I’m concerned that if people become too optimistic we could see a bubble-type situation developing. When the bubble bursts, it has horrible repercussions for the real economy.”

EMERGING MARKETS ARE ... STILL EMERGING

One worry, Mr. Smith says, is that the inflows risk encouraging emerging policymakers’ hubris, removing the pressure for reform.

Some doomsayers note big capital inflow peaks often precede crises. This may be especially true of emerging markets which remains a relatively small, illiquid asset class: the market capitalization of the 37-country MSCI emerging index, is less than a third of the U.S. S&P 500.

That means a large-scale cash influx can quickly inflate asset prices to unsustainable levels, risking a repeat of the familiar boom-bust emerging market cycles.

RBC estimates that a 1 per cent re-allocation of global equity and debt holdings will send $500-billion into emerging markets – more than 10 per cent of the MSCI emerging market cap.

NOT YET A BUBBLE

At present, emerging valuations are not in bubble territory – they trade at a discount to developed markets at around 11.5 times forward earnings.

Valuations are still below 2007 peaks and well off levels during the dot-com bubble in the late 1990s when some stocks were trading at 60-80 times forward earnings. And the volume of securities available for investment is growing.

The MSCI EM’s market capitalisation has grown by around 10 per cent a year in the past decade and emerging markets’ share of the world index has tripled to 14 per cent. The emerging debt universe too has doubled to around $6-trillion over the past five years, JPMorgan says.

Still, with investors piling in, too much cash could in coming years end up chasing too little market cap.

Global equity fund allocations to emerging markets now stand at 16 per cent of assets under management – in dollar terms that is $1.5-trillion, Barclays Capital said, noting bond allocations are at 7.2 per cent. Both are close to pre-crisis highs.

“(Positioning) has reached levels at which investors rightly question the sustainability of the EM flows story going into 2011,” Barclays analysts said in a note.

SIGNS OF NERVOUSNESS

There are signs of wariness. Many investors say that instead of increasing outright EM longs, they prefer multinationals such as Unilever that have exposure to emerging markets.

Another tactic has been to hedge EM exposure via Australian bonds, which are seen making big gains in case of a hard landing in China – a scenario feared by many.

Michael Power, global strategist at Investec Asset Management, says 2011 may well shape up to be the year in which investors learn not to be unequivocally bullish on the sector.

“People are looking at EM as a cake and saying ‘I want a slice,’ without looking at the ingredients of that cake. So some countries that are not born equal are being swept along in the trade along with the deserving ones,” he said.

“When bubbles burst, there is a fallout and the deserving emerging markets will be considered guilty by association.”

Emerging market rally continues

Greek issue contained, macro-economic data looking fairly good: fund manager

• Bloomberg
• Published: 00:00 March 13, 2010
• 

• Traders sit at their desks at MICEX (Moscow Interbank Currency Exchange) in Moscow, Russia. The emerging markets gauge is heading for its longest winning streak since May.
• Image Credit: Bloomberg

London: Stocks rose as commodity companies and banks drove the MSCI Emerging Markets Index to its fifth week of gains. Gold led commodities higher, while the yen weakened.

The emerging-markets gauge rose 0.4 per cent at 10.50am in London, heading for its longest winning streak since May. Futures on the S&P 500 added 0.2 per cent, after the benchmark index for US equities on Thursday hit a 17-month high, while the MSCI World Index climbed 0.6 per cent. The yen fell against 11 of its 16 most-traded counterparts. Gold rose for a second day and nickel climbed for the first time in five days.

Emerging-market and high-yield bond funds each took in more than $1 billion (Dh3.67 billion) in the week to March 10, according to EPFR Global, a Cambridge, Massachusetts-based research company. European industrial output rose the most in more than two decades in January, signalling the recovery may be strengthening. Japanese Finance Minister Naoto Kan said intervention is an "option" when "markets move too abruptly".

"This is a continuation of the improvement in risk appetite," said Henrik Degrer, a fund manager at Svenska Handelsbanken in Stockholm, which oversees $36 billion.

"The Greek issue seems to be contained, so now we can shift again to the macro-economic data, which is looking fairly good."

South Africa's Sasol and Cnooc of China climbed, driving the MSCI emerging index higher. The Micex index in Russia, the world's largest energy supplier, advanced 0.9 per cent for the first gain in four days. The rouble strengthened 0.6 per cent against the dollar, heading for its biggest weekly rise this year.

The MSCI World Index of 23 developed nations' stocks rose 0.3 per cent, while the Stoxx Europe 600 Index advanced 0.3 per cent. Volkswagen AG, Europe's biggest carmaker, climbed 2.7 per cent in Frankfurt on speculation that Thursday's announcement of a convertible-bond sale reduces the likelihood of a rights offer.

Nikkei climbes

The MSCI Asia Pacific Index advanced 0.4 per cent as Japan's Nikkei 225 climbed 0.8 per cent. Nissan Motor, which gets about 77 per cent of its revenue outside Japan, increased 2.4 per cent.

US futures gained before a Commerce Department report at 8.30am in Washington that may show retail sales fell in February as blizzards kept Americans away from auto dealers and limited shopping at malls.

Purchases generally dropped 0.2 per cent after rising 0.5 per cent in January, according to the median estimate of 77 economists surveyed by Bloomberg News.

Meanwhile, the yen weakened to 124.18 per euro, from 123.82. The pound strengthened 0.5 per cent to $1.5139 after UK house prices increased in February at the fastest pace in more than seven years.

The Swiss franc strengthened to 1.4589 per euro, from 1.4617 Thursday, even after the central bank said it would act to stem "an excessive appreciation" against the euro.

The Dollar Index declined 0.5 per cent to 79.922, paring its gain for the year to 2.7 per cent.

"The Bank of Japan is sensitive to the dangers of deflation, after the yen appreciated in the current cycle, and is looking at intervention, along with the Swiss National Bank," said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London.

Silver

Silver added 0.7 per cent to $17.295 an ounce. Nickel for delivery in three months advanced 1.6 per cent to $21,625 a metric ton, taking its gain this year to 17 per cent, the most of any of the main metals traded on the London Metal Exchange.

Crude oil rose 0.3 per cent to $82.35 a barrel in New York, before a meeting of the Organisation of Petroleum Exporting Countries this week.

The yield on the 10-year Greek bond, the country's new benchmark, fell 1 basis point to 6.34 per cent, while the two-year note yield advanced 10 basis points to 5.12 per cent. The yield premium investors demand to hold the 10-year security over German bunds declined 4 basis points to 311 basis points.

The cost of protecting against a default on Greek government bonds rose, with credit-default swaps climbing 5 basis points to 307, according to CMA DataVision prices.

http://gulfnews.com/business/markets/emerging-market-rally-continues-1.596116

Outlook 2010: Emerging Markets to lead the recovery

Outlook 2010: Emerging Markets to lead the recovery
Investors who held their nerve have seen great returns as emerging economies continue to out-perform their developed counterparts. We ask those in the know whether 2010 offers the same investment opportunties?

Compiled by Emma Wall
Published: 3:58PM GMT 15 Dec 2009

India's vibrant economy has produced a 250m-strong middle class Photo: HEATHCLIFF O'MALLEY

When The Association of Investment Companies (AIC) asked investment company fund managers to tip their top performing region for 2010, emerging markets came top with 35pc of the vote. Second and third were also sectors that can be included in the emerging markets umbrella- Latin America and the Far East excluding Japan respectively with 22pc and 18pc of the vote.

Dr Slim Feriani, chief executive of Advance Emerging Capital and manager of Advance Developing Markets said: “The performance of emerging market equities has handsomely outpaced that of developing markets in the past five years and we expect that outperformance to continue over the next five years.


Emerging countries have emerged as the “relative winners” from the subprime crisis and resulting recession for two prime reasons: the quality of their sovereign and household balance sheets has never looked so strong compared with developed countries as it does currently; and their economic and corporate earnings growth is and will continue to easily outstrip that of the developed world in both real and nominal terms for the foreseeable future."

Following Schroders’ annual outlook for 2010 media presentation, Alan Brown and Keith Wade predicted that the current global rally is likely to continue into 2010 with emerging markets leading the economic recovery. However, they warned that there are a number of potential monetary and economic factors that could derail the global recovery.

To protect against these, Schroders recommended a more dynamic approach to asset management involving greater diversification and flexibility in order to protect clients’ portfolios.

Close Asset Management believe that emerging markets here to stay. "The growing strain on Western consumers and government finances are likely to be reflected in weaker macroeconomic data and pressure on revenues for many years to come," said Stuart Dyer, head of distribution for Close. "Equity market valuations do not look well underpinned in an environment of low or faltering growth.

For investors seeking long-term growth emerging markets are likely to look increasingly attractive and we are already seeing a sea-change in risk attitudes to investment in these markets; expect this to continue and exposure to these markets to increase."

Fidelity International's Mr Teera Chanpongsang, portfolio manager for their India Focus Fund and Emerging Markets Fund agreed. He said that emerging markets would continue to offer strong long term investment opportunities and stable governments and developing industry will fuel growth.

He said: “Early signs of a recovery are visible in recent economic indicators and earnings upgrades. The region has one of the strongest GDP growth rates in the world, driven by favourable demographics and healthy population growth, which means more people are added to the region’s work force."

http://www.telegraph.co.uk/finance/personalfinance/investing/6817246/Outlook-2010-Emerging-Markets-to-lead-the-recovery.html