3 Reasons Not To Ignore Global Emerging Markets

Full article here: FSM

KEY POINTS

• With the growing importance of the region, EM economies will make up nearly half the global economy over the next five years, making the region too large to ignore by investors
• EM equities also continue to have little representation in global investor portfolios and equity benchmarks
• The growth disparity between EM and developed economies is even more stark in the current environment, which should see EMs find favour amongst global investors
• Stronger economic growth should translate to superior rates of earnings growth, driving stock market returns
• While the growth prospects of EMs are invariably stronger, investors are currently not paying a premium for these positives; EMs actually trade at a discount to their developed market peers at present
• We forecast strong potential upside for EM equities, and reiterate our 5.0 star “very attractive” rating on the market

Even as the IMF and World Bank recently downgraded their forecasts for global growth in 2012 and 2013, emerging markets (EMs) remain a bright spot, with long-term structural themes of increasing urbanisation, favourable demographics and a growing middle-class expected to propel their economies forward. In this update, we look at three reasons not to ignore EM equities which are currently our favourite regional equity market with a 5.0 star “very attractive” rating.

REASON 1: TOO LARGE TO IGNORE

Even as many investors still view EM equities as a peripheral “satellite” investment, the representation of EM countries in the global economy has grown by leaps and bounds. Based on the latest forecasts of the IMF, EM economies will increase their representation in the global economy to 43% by 2017, up from 38% presently (in 2012), and significantly more than the 23.5% in 1980 (see Chart 1), a function of their quicker pace of economic expansion. Simply put,over the course of the next five years, EM economies will make up nearly half the global economy, which will make the region too large to ignore by investors.

CHART 1: INCREASING REPRESENTATION IN THE GLOBAL ECONOMY

Investment Implications:

Despite their rising importance to the global economy, EM equities remain under-represented as a percentage of global equity market capitalisation, as well as within investor portfolios. As mentioned earlier, EM economies (based on the IMF classification) will make up 38% of the global economy (in nominal USD terms) in 2012. In contrast, their respective stock markets had a market capitalisation of USD10.6 trillion (as of 12 October 2012), making up just 21.1% of global stock market capitalisation.  

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Quite busy with work these few days, but will still try to post quick responses about the market! Another counter we are looking into is 0489.HK!

Are These Equity Funds The Most Actively-Managed?

While gains or losses of the broader equity markets ultimately drive returns of equity funds, the component of active management can also make a difference to an investor’s returns. The majority of funds on our platform are actively-managed funds, where the fund manager makes specific investment decisions with the aim of outperforming a benchmark (like Singapore equity funds trying to outperform the FTSE STI).

The extent to which a fund’s performance deviates from its benchmark is often referred to by the investment community as “active risk” or “tracking error”, terms which seem to carry negative connotations - this is simply a result of modern portfolio theory’s definition of the market (ie. the benchmark) having only “market risk”, so by deviating from the market, an investor is thus being exposed to additional investment risk.

While there are those who prefer to have less “active risk” in their investments, it is also logical that managers who deviate more from the benchmark can offer investors a better chance at obtaining stronger investment returns, which may appeal to some investors. In this article, we run a simplified quantitative “tracking error” screening of several popular categories of funds on the platform, highlighting some which appear to be more actively-managed, and others which have less tracking error.

METHODOLOGY

Our screening process utilised monthly returns (in SGD) for the funds compared against that of the benchmark, and calculated over 3-year and 5-year periods which ended in August 2012. The formula used was the “root mean square” of active returns (defined in our case as the difference in monthly returns, whether positive or negative), while we also used the same benchmark across each category – while this approach disregards the subtle “style” differences in benchmarks for different funds, it allows for a fairer peer-to-peer comparison. In addition, we also omitted funds which are principally invested in specific sectors, or small/mid-cap stocks.

RESULTS

Table 1: Average Tracking Error by Category
Category 5-Year Tracking Error 3-Year Tracking Error Benchmark Used US 8.5% 6.0% S&P 500 Asia Pacific ex-Japan 7.2% 4.6% MSCI AC Asia Pacific ex-Japan China 7.2% 6.0% MSCI China Asia ex-Japan 6.5% 5.8% MSCI AC Asia ex-Japan Europe 6.0% 4.7% Stoxx 600 Global 5.8% 4.6% MSCI AC World Global Emerging Markets 5.8% 5.0% MSCI Emerging Markets Japan 5.1% 4.0% Topix Singapore 4.3% 3.1% FTSE STI
Source: iFAST compilations, as of end-August 2012

Among the 9 categories of equity funds we examined, funds invested in the US, Asia, and China had some of the highest tracking error figures over a 5-year period, while Japan and Singapore equity funds had the lowest. With the exception of Asia Pacific ex-Japan equity funds, the trend was fairly consistent over 3 years as well. That US equity funds posted the highest tracking error amongst the various equity fund categories is somewhat surprising, since the US equity market is often viewed as one of the most efficient in the world, which would be an argument for US managers to take a more passive approach; our data appears to suggest otherwise. We now take a closer look at some of the categories to highlight funds which have demonstrated larger or smaller deviations vis-à-vis the benchmark, an indication of how actively managed the strategy is.

Full article here: FSM

Hong Kong holidays...

Hong kong is having holidays for 2 days, Monday and Tuesday so we are just looking at STI to see if there's any good picks. 

Was pretty busy these few weeks with work and didn't manage to post any insights but the markets were pretty sour for the past 1 week so it was a good chance to take a short break while monitoring how the trend is building in.

Asia Recovery Delayed Until 2013 as Manufacturing Sags

An economic recovery in Asia will likely be delayed until 2013, the latest batch of manufacturing surveys around the region suggest, with economists warning that any rebound remains dependent on Asia’s growth engine, China, picking up momentum.

Adek Berry | AFP | Getty Images

Data on Monday showed factory activity in China remained in contractionary territory for a second consecutive month in September, while manufacturing activity in regional peers, including export-focused Taiwan, and Indonesia pointed to a slowdown.

The HSBC Taiwan purchasing managers index (PMI) fell to its lowest level in ten months in September at 45.6, while Indonesia’s PMI weakened to 50.5 last month from 51.6 in August. A PMI reading above 50 indicates expansion, while a number below 50 implies a contraction.

Separately, exports out of Indonesia fell by a higher-than-expected 24.3 percent in August from a year earlier – reflecting weakening demand out of mainland China and the West.

“There are few signs yet that stabilization has set in, with fourth quarter data likely to show a further slide in activity,” Frederic Neumann, co-head of Asian economic research at HSBC told CNBC.

“This is the most challenging stretch for Asia's manufacturers since the slump caused by the Global Financial Crisis,” he added.

China - a major source of external demand for other countries in Asia - was widely forecast by economists to stage a turnaround in the second or third quarter of this year; however this has failed to materialize.

Full article here: CNBC