The Emerging Markets Opportunity Society of Pension Professionals - PowerPoint PPT Presentation

The Emerging Markets Opportunity The Emerging Markets Opportunity Society of Pension Professionals Society of Pension Professionals 6 th November 2014 Julian Mayo Co-Chief Investment Officer Charlemagne Capital (UK) Limited 1

The Emerging Markets Opportunity Emerging Markets • Reforms • Stable growth Stable growth • Discounted valuations • Market focus should revert to quality Oppo Opportunities rtunities 2

The Emerging Markets Opportunity Emerging Markets Reforms in key economies % of EM • China – SOEs; household registration; RMB; one child policy China SOEs; household registration; RMB; one child policy 20% 20% • India – focus on exports; infrastructure; urbanisation; finance 7% • Indonesia – fuel subsidy elimination; infrastructure 3% • Mexico – energy; telecoms Mexico energy; telecoms 5% 5% • Brazil – where do we start?! 11% 46% Significant progress Significant progress 3

The Emerging Markets Opportunity Structural Reforms Most countries are improving Citi's Structural Reforms Index 50 40 Better 30 30 20 10 0 ‐ 10 Worse ‐ 20 ‐ 30 ‐ 40 Mexico Malaysia lippines Brazil Egypt Russia Hungary India China Taiwan donesia Korea olombia Turkey Nigeria Poland Panama Peru Thailand Chile h Africa rgentina Ind M P Co H T Ar Phi Sout They are really happening They are really happening 4 Source: Haver, Citi Research

The Emerging Markets Opportunity Emerging Markets Growth vs Developed Markets 10 Gross domestic product, constant prices 8 6 4 % 2 0 ‐ 2 ‐ 4 2007 2008 2009 2010 2011 2012 2013 2014 2015E Advanced economies Emerging market and developing economies Growth premium no Growth premium no longer contracting longer contracting 5 Source: IMF Research

The Emerging Markets Opportunity Emerging Economies Economic surprise indices in EM not that dissimilar to DM Citi Economic Surprise Index 80 60 40 20 0 0 ‐ 20 ‐ 40 ‐ 60 ‐ 80 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 Jul 2014 G10 EM EM tracking DM EM tracking DM 6 Source: Bloomberg, Citi Research

The Emerging Markets Opportunity Current Accounts Clear improvement in India and Turkey Current Acct. % GDP, Current vs 2013Q2 0% ‐ 2% ‐ 4% ‐ 6% ‐ 8% ‐ 10% ‐ 12% India Indonesia Brazil South Africa Turkey 2013Q2 2014Q2 Not so Not so fragile fragile 7 Source: Haver, Citi Research

The Emerging Markets Opportunity Remember Why We Are In This Mess Emerging Markets debt still very low Total Debt as % of GDP (Non Financial Private Sector + Govt ) 350% 300% 300% 282% 278% 276% 274% 284% 258% 242% 246% 250% 200% 150% 142% 158% 142% 150% 134% 116% 119% 113% DM 100% EM 50% 2006 2007 2008 2009 2010 2011 2012 2013 Source: BIS, IMF, Haver Analytics, Morgan Stanley Research. The debt The debt is in the West is in the West DM = US, EA, UK, JPN 8 EM = CHN, IND, KOR, IDN, MAL, THL, BRA, MEX, RUS, POL, CZE, HUN, TUR, IST, SAF

The Emerging Markets Opportunity PE Ratios On reported PE, GEMs are trading at 1 standard deviation below mean PE (x) 40 35 35 30 25 20 16x 15 13x 10 5 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Global Emerging Markets Cheap by Cheap by historic standards historic standards 9 Source: MSCI, Citi Research

The Emerging Markets Opportunity Emerging Markets PER relative to developed markets 12M fwd PE of EM relative to DM 1.1 1.0 Avg. + 2 Stdev. 0.9 0.8 Average Avg. ‐ 2 Stdev. 0.7 0.6 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Near crisis lows Near crisis lows 10 Source: MSCI, IBES, Thomson Reuters DataStream, HSBC

The Emerging Markets Opportunity Emerging Markets 12 month forward operating margins 12M ‐ forward operating margins for EM and DM 25% 24% 23% 22% 21% 20% 20% 19% 18% 17% 16% 15% 2006 2007 2008 2009 2010 2011 2012 2013 2014 EM EM DM DM Profitability remains higher Profitability remains higher 11 Source: MSCI, IBES, Thomson Reuters DataStream, HSBC

The Emerging Markets Opportunity Emerging Markets Relative earnings revisions for current and following years Relative Earnings Revisions Ratio of Basket, 3mma % 15 10 5 0 ‐ 5 ‐ 10 ‐ 15 15 ‐ 20 2008 2009 2010 2011 2012 2013 2014 FY1 FY1 FY2 FY2 Realistic expectations at last? Realistic expectations at last? 12 Source: Charlemagne Capital

The Emerging Markets Opportunity EM Earnings DM revisions vs EM: at the same level Earnings Revision Index EM vs DM 50 40 30 20 10 0 ‐ 10 ‐ 20 ‐ 30 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 3 per. Mov. Avg. (EM rel. DM) EM earnings expectations realistic EM earnings expectations realistic 13 Source: IBES Aggregate, Citi Research

The Emerging Markets Opportunity Equity vs Debt EM debt markets stable relative to DM, even as EM equities underperform GEMs Bond Spread vs Equity Spread 200 1.1 300 1.0 400 0.9 500 0.8 600 0.7 700 0.6 800 0.5 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Jul 2013 Jan 2014 EMBI Global Comp Spread, inverted (LHS) MSCI EM/US Price (RHS) EM equities relatively undervalued EM equities relatively undervalued 14 Source: Haver, MSCI, Datastream, Citi Research

The Emerging Markets Opportunity Emerging Markets Investing in Equity and Income • Seeking attractive returns from quality companies with a dividend culture • Low volatility exposure • Capital growth and income • Opportunities across all regions, sectors and market caps Attractive investment oppo Attractive investment opportunity rtunity 15

The Emerging Markets Opportunity Appendix 16

The Emerging Markets Opportunity FX Reserves to Imports EMs less vulnerable to FX fluctuations than in ’90s Import Coverage Ratio FX reserves to Import 1.6 1.4 1.2 1.0 0 8 0.8 0.6 0.4 0.2 0.0 1989 1992 1995 1998 2001 2004 2007 2010 2013 AxJ LatAm EMEA Less risk from FX Less risk from FX 17 Source: CEIC, Haver, IMF, FactSet, Citi Research

The Emerging Markets Opportunity Public Debt Levels EM public debt compared to DM EM vs DM public debt to GDP Public Debt as % of GDP 120 110 100 90 80 70 70 60 50 40 40 30 20 1983 1988 1993 1998 2003 2008 DM EM EM look far healthier EM look far healthier 18 Source: CEIC, Haver, IMF, Citi Research

The Emerging Markets Opportunity Demographics EM better off than DM % of Working Population (aged 15 ‐ 64) 70% 68% 66% 64% 62% 60% 58% 56% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 DM EM There’s China, but there’s also India There’s China, but there’s also India 19 Source: Haver, United Nations, Citi Research

The Emerging Markets Opportunity Spot The Difference? Steel Consumption Per Capita 1,400 Korea kg) 1,200 1 200 tion Per Capita (k 1,000 Taiwan 800 Steel Consumpt Japan 600 2013E US China 2014E 400 200 India 0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 GDP per Capita (PPP, 2012 Constant Dollar) GDP C it (PPP 2012 C t t D ll ) No, I thought not! No, I thought not! 20 Source: WorldSteel, Conference Board, IMF, Morgan Stanley Research

The Emerging Markets Opportunity Earnings Growth EPS trends Regional EPS since their 2007/08 peaks 120 110 100 90 80 70 60 50 Peak time = 0 40 ‐ 12 0 12 24 36 48 60 72 GEMS 7/2008 AC World 2/2008 EM earnings outperform DM since prior peak EM earnings outperform DM since prior peak 21 Source: MSCI, Citi Research

The Emerging Markets Opportunity EM PE Ratios Relative To Developed EM discount has widened PE(x) EMs PE relative to Global 40 35 35 30 25 20 15 10 5 1994 1998 2002 2006 2010 2014 AC World GEMS EM valuations near long term lows EM valuations near long term lows 22 Source: Haver, MSCI, Citi Research

The Emerging Markets Opportunity Emerging Markets ROE and PB ratio 40% 4% 20% 2% 0% 0% ‐ 20% ‐ 2% ‐ 40% ‐ 4% ‐ 60% 60% ‐ 6% 6% ‐ 80% ‐ 8% 1988 1991 1994 1997 2000 2003 2006 2009 2012 EM PBV Discount to World (LHS) EM ROE rel. to World (RHS) Ems cheaper with Ems cheaper with higher ROE higher ROE 23 Source: EPFR Global, MSCI, Citi Research

The Emerging Markets Opportunity Disparate Opportunity Set ROIC v Capex/Payout ratio ROIC Cross Section comparison of ROIC vs Capex to Payout ratio 16% 14% 14% ID 12% RU TR EMEA IN 10% US US TH TW CN ZA EMAsia 8% MX PH EU MY PL KR 6% LATAM LATAM JP 4% BR 2% 0.8 0.8 2.8 2.8 4.8 4.8 6.8 6.8 8.8 8.8 10.8 10.8 12.8 12.8 Capex / Payout Korea stands out for the wrong reasons Korea stands out for the wrong reasons Note: The payout here includes both dividend and shares buyback 24 Source: Worldscope, FactSet, Citi Research