The investible emerging markets equity universe has experienced a seismic shift over the past decade.
Major markets have moved from being very globally exposed and cyclical, to more of a mix of global information technology and local consumer-driven stocks. That shift has clear implications for the changing risks that drive emerging markets investors’ returns, of course. But it should also encourage us to think again about how emerging markets are valued - relative to developed markets, but also relative to their own history. Emerging markets may not be as expensive, or as cyclical, as one might think.
From commodities to computers
The shift in the investable markets has resulted in a shift in the MSCI Emerging Markets Index. At the end of 2007, energy (18 per cent) and materials (15 percent) accounted fully for one-third of the index. Fast-forward to 2017, and those two sectors account for only 14 per cent. Information technology has risen to 28 per cent of the index from 10 per cent, partly through faster growth and partly because MSCI included China’s predominantly technology focused American Depositary Receipts (ADRs) in the index during 2015-16.
Commodity-driven markets such as Russia and Brazil have declined as a proportion of the index, while China, increasingly represented by internet software and services stocks, has grown. At the end of 2007, China accounted for 16 per cent of the index, and Chinese tech companies 0.3 per cent; by 2017 China had a 30 per cent allocation and China tech accounted for 12.3 per cent of the index.
The shift to information technology in the investable markets better reflects the “real” economy and consumer behavior within it, both now and especially in the future. But how should one value emerging markets, given this radical change?
A changing profile implies changing views on valuation
We might expect the MSCI Emerging Markets Index to have become less attractive on a valuation basis, relative to both its history and to the valuation in developed markets.
In fact, the MSCI Emerging Market Index not only trades at a lower price-to-equity ratio than the MSCI World and S&P 500 Indexes, it has also been getting relatively cheaper for the past six years, even as its exposure to the technology sector has grown.
Broad technology-sector valuations are in the middle of their own 10-year historical range. Valuations in internet stocks are rich, but the hardware and semiconductor industries are trading cheaply relative to their history, probably due to the past boom-and-bust cycles in these sectors. We would argue that these companies should not all be painted with a broad brush, however, as certain sub-segments are benefitting from an entirely new theme of technology and semiconductor proliferation in autos and other appliances.
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Compare the US and emerging markets energy, material and technology sectors using price-to-earnings ratios and estimated five-year earnings-per-share growth, and the picture becomes even clearer. First, the three Emerging Markets sectors trade more cheaply relative to their US counterparts.
Second, outside of US energy, which is coming off a lower earnings base, they also have stronger earnings growth. When we go back up to the index level again, we can see this dynamic playing out in price-to-earnings growth ratios. In developed markets, this ratio sits at around 1.5, whereas in emerging markets it is less than 0.8. Technology stocks in the emerging markets are cheaper, even though their earnings are growing faster.
Strong Growth Is Not Without Risk
This dramatic change in emerging markets does come with an element of concentration risk. The top four holdings in the MSCI Emerging Market Index are all technology firms—and the fifth has a 30 per cent stake in the first. Together, they account for nearly 20 per cent of the index.
The top five stocks in the S&P 500 Index are also dominated by technology today, but by contrast they account for only 12 per cent of the index. Having said that, the sector as a whole accounts for 28 per cent of the MSCI Emerging Markets Index, versus 26 per cent of the S&P 500. While concentration has increased we do not believe it is out of sync with other markets.
We view emerging markets as an attractive investment opportunity, especially on a relative-value basis. We like the superior growth characteristics of technology, and we would argue that, with earnings growth led by sectors that are not solely dependent on the global economic cycle and global trade dynamics, emerging markets exhibit a very different profile now than they have had in the latter stages of previous global cycles.
Conrad Saldanha is Senior Portfolio Manager - Emerging Markets Equity at Neuberger Berman, which is a member of The Gulf Bond and Sukuk Association.
Drivers’ championship standings after Singapore:
1. Lewis Hamilton, Mercedes - 263
2. Sebastian Vettel, Ferrari - 235
3. Valtteri Bottas, Mercedes - 212
4. Daniel Ricciardo, Red Bull - 162
5. Kimi Raikkonen, Ferrari - 138
6. Sergio Perez, Force India - 68
JOKE'S%20ON%20YOU
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Guns N’ Roses’s last gig before Abu Dhabi was in Hong Kong on November 21. We were there – and here’s what they played, and in what order. You were warned.
- It’s So Easy
- Mr Brownstone
- Chinese Democracy
- Welcome to the Jungle
- Double Talkin’ Jive
- Better
- Estranged
- Live and Let Die (Wings cover)
- Slither (Velvet Revolver cover)
- Rocket Queen
- You Could Be Mine
- Shadow of Your Love
- Attitude (Misfits cover)
- Civil War
- Coma
- Love Theme from The Godfather (movie cover)
- Sweet Child O’ Mine
- Wichita Lineman (Jimmy Webb cover)
- Wish You Were Here (instrumental Pink Floyd cover)
- November Rain
- Black Hole Sun (Soundgarden cover)
- Knockin’ on Heaven’s Door (Bob Dylan cover)
- Nightrain
Encore:
- Patience
- Don’t Cry
- The Seeker (The Who cover)
- Paradise City
The specs
Engine: four-litre V6 and 3.5-litre V6 twin-turbo
Transmission: six-speed and 10-speed
Power: 271 and 409 horsepower
Torque: 385 and 650Nm
Price: from Dh229,900 to Dh355,000
Results:
2.15pm: Handicap (PA) Dh60,000 1,200m.
Winner: AZ Dhabyan, Adam McLean (jockey), Saleha Al Ghurair (trainer).
2.45pm: Maiden (PA) Dh60,000 1,200m.
Winner: Ashton Tourettes, Sam Hitchcott, Ibrahim Aseel.
3.15pm: Conditions (PA) Dh60,000 2,000m.
Winner: Hareer Al Reef, Gerald Avranche, Abdallah Al Hammadi.
3.45pm: Maiden (PA) Dh60,000 1,700m.
Winner: Kenz Al Reef, Gerald Avranche, Abdallah Al Hammadi.
4.15pm: Sheikh Ahmed bin Rashid Al Maktoum Cup (TB) Dh 200,000 1,700m.
Winner: Mystique Moon, Sam Hitchcott, Doug Watson.
4.45pm: The Crown Prince Of Sharjah Cup Prestige (PA) Dh200,000 1,200m.
Winner: ES Ajeeb, Sam Hitchcott, Ibrahim Aseel.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
Killing of Qassem Suleimani
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The specs
Engine: 2.0-litre 4-cyl
Power: 153hp at 6,000rpm
Torque: 200Nm at 4,000rpm
Transmission: 6-speed auto
Price: Dh99,000
On sale: now
Formula Middle East Calendar (Formula Regional and Formula 4)
Round 1: January 17-19, Yas Marina Circuit – Abu Dhabi
Round 2: January 22-23, Yas Marina Circuit – Abu Dhabi
Round 3: February 7-9, Dubai Autodrome – Dubai
Round 4: February 14-16, Yas Marina Circuit – Abu Dhabi
Round 5: February 25-27, Jeddah Corniche Circuit – Saudi Arabia
Engine: 5.6-litre V8
Transmission: seven-speed automatic
Power: 400hp
Torque: 560Nm
Price: Dh234,000 - Dh329,000
On sale: now
Milestones on the road to union
1970
October 26: Bahrain withdraws from a proposal to create a federation of nine with the seven Trucial States and Qatar.
December: Ahmed Al Suwaidi visits New York to discuss potential UN membership.
1971
March 1: Alex Douglas Hume, Conservative foreign secretary confirms that Britain will leave the Gulf and “strongly supports” the creation of a Union of Arab Emirates.
July 12: Historic meeting at which Sheikh Zayed and Sheikh Rashid make a binding agreement to create what will become the UAE.
July 18: It is announced that the UAE will be formed from six emirates, with a proposed constitution signed. RAK is not yet part of the agreement.
August 6: The fifth anniversary of Sheikh Zayed becoming Ruler of Abu Dhabi, with official celebrations deferred until later in the year.
August 15: Bahrain becomes independent.
September 3: Qatar becomes independent.
November 23-25: Meeting with Sheikh Zayed and Sheikh Rashid and senior British officials to fix December 2 as date of creation of the UAE.
November 29: At 5.30pm Iranian forces seize the Greater and Lesser Tunbs by force.
November 30: Despite a power sharing agreement, Tehran takes full control of Abu Musa.
November 31: UK officials visit all six participating Emirates to formally end the Trucial States treaties
December 2: 11am, Dubai. New Supreme Council formally elects Sheikh Zayed as President. Treaty of Friendship signed with the UK. 11.30am. Flag raising ceremony at Union House and Al Manhal Palace in Abu Dhabi witnessed by Sheikh Khalifa, then Crown Prince of Abu Dhabi.
December 6: Arab League formally admits the UAE. The first British Ambassador presents his credentials to Sheikh Zayed.
December 9: UAE joins the United Nations.
