In a topic which could be discussed at great length beyond this
forum, I would at least like to sketch the surface of a concept I
think many investors (including me) are having trouble with.
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Emerging market (
) equities have vastly underperformed those global equities who are
getting their growth largely form emerging markets.
Part of the answer lies in what is a long standing precept that
commodities have to be rallying for emerging market equities to do
well, and that emerging market equities are dominated by state
controlled companies where corporate governance is awful.
In the last 18 months commodities have struggled and state
controlled emerging market companies have dominated the headlines
for their ineptitude. Thus, emerging markets have badly lagged
domestic markets (see chart), as U.S. and European multinationals
have gone to all-time highs.
Because we are in the month of May, markets are overly consumed
with "risk on" and "risk off".
Investment allocation is difficult in a world where commodity
prices seem to be signaling one thing but measures of risk say
another. Copper prices are challenging multiyear lows while
the Spanish 10yr yield is in 2007 territory and Italy is issuing
2yr paper at all-time lows.
China is grinding lower but U.S. and European indices are at
Is global growth collapsing or is the world healing slowly, with
strong pockets of real growth in key parts of the global
Is the move to all-time highs in global equity markets just a
run of free money or should investors be even more confident with
global growth despite what spot commodity prices are doing?
Yesterday's one brain cell analysis worked and correlations were
high between the asset classes.
I often write about deflationary forces of the asset bubble
popping and that Fed policy is complicating the road to true
healing. I believe we are living in a world where the
pressure on prices for most things (except of course daily "stuff"
we seem to consume...) is to move lower.
But the correlation of higher commodities with higher global
growth may have started to run its course. While we are
not surfing the wave of the commodity super-cycle go-go days, there
is still major demand for copper, ore, steel, and other core
China will not lead the next phase of global growth, nor will
Brazil but there is a housing recovery going on in the U.S. and
there are still 5 trillion in Yuan infrastructure projects due to
be implemented in China over the next 5 years.
For many of us in emerging markets this has all been a head
scratcher as "our stocks" are massively underperforming despite
that conditions that emerging markets should generally love:
low inflation, falling rates, consumption growth, albeit slower
than it was pre-crisis. We all may need to adjust our
thinking if we have not already done so to stay the course on
fundamentals and not be expecting the next May/June disaster for
emerging markets. If global companies like Siemens, GM, Coke,
and HSBC can grow with emerging markets as a core driver, maybe
it's time to look for even greater returns out emerging market
companies who have lagged the move in global markets.
Either way we should be mindful of the following: lower
commodity prices do not necessarily mean risk off, and correlations
breaking down is a good thing. Stay tuned for our
Emerging Money Global Index where we highlight the top 30
multinationals operating in emerging markets.