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Investing in Emerging Market Steven Yang Yu - Redington 02 December 2014

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Investing in Emerging Market by Steven Yang Yu.

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  • 1. Investing in Emerging MarketSteven Yang Yu - Redington02 December 2014

2. What should you consider beforedesigning investment strategy?02 December 2014 3. Begin with the end in mind31,0001,2001,4001,6001,8002,0002,2002,400GBP MillionsAssets:1.6bnAssets:1.8bnRequired Return:7% peryearRequired Return: 5% peryearLiabilities:2.3bnFull Funding(Assets =Liabilities)Return Requirement?Risk budget?Governancestructure?Liquidity profile?All investment strategy starts with the cleargoals, objectives & constraints of the client,including a defined and agreed risk budget- Redington Investment Principle 4. 4Achieving your end gameMeeting the GapAssets withCash FlowsSmooth VolatilityLiability DrivenInvestment /HedgingProperty LeasesCorporate BondsDeveloped Market EquityEmerging Market EquityEmerging Market DebtRisk ParityMulti-AssetInfrastructure 5. Why Emerging Market?02 December 2014 6. Capital Markets Under Represented02 December 2014 6Source: Neuberger Berman7.0%15.0%41.0%49.0%64.0%75.1%82.9%93.0%85.0%59.0%51.0%36.0%24.9%17.1%0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%Debt Market CapEquity Market Cap (Float Adjusted)GDP at Market RatesGDP at PPPForeign Exchange ReservesLand MassPopulationEmerging Market Economies as % of Total WorldEmerging Markets Developed Markets 7. Economic Contribution Continues to Increase02 December 2014 7Source: IMF World Economic Outlook, April 20140%10%20%30%40%50%60%70%80%90%100%2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Countribution of GDP by Countryothers Latin America Rest of EM Asia China Japan Developed Europe North AmericaNorth America (35% to 24%)Developed Europe (27% to 23%)Japan (13% to 6%)China (4% to15%)Rest of EM Asia (3% to 7%)Latin America (5% to 7%)Others (12% to 18%) 8. Rising Domestic Consumption02 December 2014 8468101214161820% of Households with DisposableIncome > $25,000 USD in China263412300102030405060702010 2025in $ TrillionWorld Consumption GrowthDeveloped Market Emerging MarketCompoundGrowth 2.0%CompoundGrowth 8.4%Source: FundSmith 9. Healthy Balance Sheets02 December 2014 90204060801001202001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019General Government Gross Debt (% of GDP)Developed Market Emerging MarketSource: IMF World Economic Outlook, April 2014 10. Growing Investment Universe02 December 2014 10EM Fixed Income Universe EM Equity Market Cap (USD Trillions)Source: Ashmore 11. Which Asset Strategies?02 December 2014 12. Passive Equity02 December 2014 12Source: MSCIChina20%SouthKorea14%Taiwan12%Brazil10%SouthAfrica8%Other36%MSCI EM Sector Breakdown MSCI EM Country BreakdownFinancials28%InformationTechnology17%Energy10%ConsumerDiscretionary9%ConsumerStaples8%Materials8%Telecom8%Industrials6% Utilities4%Health Care2% 13. Passive Equity02 December 2014 13050100150200250300350400450500Developed vs Emerging MarketsMSCI World MSCI EMSource: Bloomberg 14. Passive Equity02 December 2014 14050100150200250300350400450500FX carry explains some of EM OutperformanceMSCI World MSCI EM MSCI World + EM CurrencyEquityOutperformanceFX CarryperformanceSource: Bloomberg, MSCI 15. Active EquityHow do managers outperform?02 December 2014 15Top DownBottom UpMacroeconomicThematicCurrencyCountrySectorStock-Specific-30.00%-20.00%-10.00%0.00%10.00%20.00%30.00%40.00%50.00%Russia Hungary MSCI EMIndonesia EgyptMSCI EM Biggest Gainers and Losers,Q1-3 2014Source: MSCI, JP Morgan, HSBC 16. Active EquityHigh variation in active returns02 December 2014 16-30-20-10010203040Outperformance relative to MSCI EM (%)Last 5y Last 3y Last 1yHigh 20.95 19.64 30.1125th Percentile 3.91 4.43 3.7375th Percentile 0.02 0.14 -1.52Low -9.50 -7.94 -18.65Index Return 10.43 7.63 11.05Outperformance relative to MSCI EMSource: eVestment Alliance, Returns are gross of fees 17. Emerging Market DebtFast growing market02 December 2014 17o Emerging market debt accounts forc.25% of total global credit market size($30trn total)o 3 main types of investible debt: JPMorgan EMBI: Hard currencysovereign JPMorgan GBI-EM: Local currencysovereign JPMorgan CEMBI: Corporates (hardcurrency)Mortgages/Securitised40%Global IGCorporate24%Global HighYield11%EM Debt25%GLOBAL CREDIT MARKETSource: Babson Capital, Bank of America, BarclaysCapital, Credit Suisse, SIFMA, as of end 2013 18. Emerging Market DebtGood diversification and credit quality02 December 2014 18Brazil, 27%Mexico, 21%Poland, 11%Turkey, 8%Malaysia, 8%Russia, 6%Africa, 10%Other, 8%REGIONAL SPLIT: GBI-EMAA6%A19%BBB48%BB9%B8%C8%NR2%RATING SPLIT: EMBI GLOBAL74%InvestmentGrade 19. Emerging Market DebtAttractive yields02 December 2014 195.31%6.54%5.22%3.67%2.28%0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%EM HardCurrencyEM LocalCurrencyUS High Yield US IG Credit USGovernmentYields to maturity as June 201401002003004005006007008009002004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014OAS (bps)Credit Spreads of EMD vs. Major Bond MarketsEMBI Global BAML US Govt & CorpBAML US Corp BAML US Corp BBBSource: MSCI, JP Morgan, HSBC, Neuberger Berman 20. 20Conclusions Structural economic growth Improving credit fundamentals and demographic trends Access to various source of returns Financial, geopolitical and currency risk remain Expanding investible universe for global investors Lack of research coverage Career opportunities in local markets