Tag Archives: Emerging markets

As Time Goes By – Technology and Emerging Markets

Technology advances are swift in the emerging markets.

Photo: David Wilson. Source: Wikipedia

The Templeton Emerging Markets Group recently noted the evolving make-up of the emerging market technology sector. In theory, an emerging market is an economy in transition from state controlled to one with increasing economic freedom. Along comes integration in the global marketplace and greater standards of living. A more familiar imagining of the emerging market is one of extraction: both of resources (commodities and labor) and cheap, manufactured goods.

Global investment in emerging markets took off in the 1990s. At that time, technology companies were 3% of the MSCI Emerging Market Index. Now it’s at 23%. Growth in software and services has outstripped that of the production of hardware and components.

In China, Baidu, Alibaba and Tencent are the holy trinity of tech companies (paywall). Although they lack the size of the FANG stocks, they not only dominate their home markets but invest in many of the same lines of business as their American counterparts. Autonomous cars, grocery delivery, drones…

Companies in the emerging markets can innovate in certain areas like mobile payments or fintech that traditional tech companies struggle with because they can adapt and add on to existing technology without the legacies of mainframe or desktop computing or certain consumer expectations.

Many people around the world get online for the first time through their phone. 75% of web pages loaded in India are done on mobile devices. Chinese users rarely use a credit card. Got a tricky bill to split at a restaurant? Each diner need only scan a QR code at their table with their WeChat app and enter the amount they wish to pay the vendor. M-Pesa, a mobile phone based money transfer app was launched in Kenya in 2007 by Vodafone. Users bypass the bank- mobile network operators and retail outlets act as banking agent. In 2016, M-Pesa had 29.5 million active customers, 287,400 agents, and operated in 10 countries. It processes billions of transactions a month, an integral aspect of everyday life for millions of people around the world.

While it is no surprise that companies in emerging markets would increasingly turn to serve their domestic economy and cater to consumers, investors tend to focus on their home markets and developments abroad can pass unnoticed. Who knows? Maybe soon we will see an EM company successfully take on an issue in the American market left unaddressed by our own legacy products.

Veronica Peterson

Emerging Where?

What’s happening in emerging markets?

Souk in Rabat, Morocco. Photo: Cloudzilla. Source: Wikipedia

For much of 2016, emerging markets have performed well. Higher oil prices and a steady dollar have allowed these markets to stabilize and even do slightly better as the year progressed.

But the election of Donald Trump and Republican majorities in both houses of Congress on November 8 may represent a pivot point. There is potential for significant fiscal stimulus, protectionist trade policies, and a different outlook for interest rates by Fed. Winners and losers among the various markets may vary dramatically going forward.

The most important variable for emerging markets is trade policy. Protectionist policies will especially hurt countries that depend on exports to the US for their growth, like China, India, and Mexico. On the other hand, relatively closed countries that less dependent on trade — like Brazil or Columbia or many African nations – will tend to do better. Also, Fed policy and the value of the dollar will have a major impact. If the Fed raises rates aggressively and the value of the dollar rises, that will be quite negative. Many developing nations have debt denominated in dollars and will struggle to service their debt if the dollar goes up.

The good news is that most emerging markets come into the present situation with relatively attractive valuations. The dollar’s rise since 2014 – along with other factors – has caused those markets to pull back. In addition, emerging markets have more growth potential than elsewhere.

Emerging Markets. Source: Bloomberg

Donald Trump’s election has caused many investors to pull back from emerging markets. But all markets are not created equal. Differing economic structures will lead to differing outcomes for different nations. The prospects are far more nuanced than they have been in the past.

One thing is certain: the election has made investment analysis a lot more complicated.

Douglas R. Tengdin, CFA

Chief Investment Officer

Emerging To …

Emerging From …

What’s happening with emerging economies?

Country size weighted by projected population in 2050. Source: Worldmapper.org

It wasn’t supposed to be this way.

The developing economies were supposed to lead the markets higher. The combination of population growth and development economics should have provided a turbo-shot to older, mature, slow-growing developed economies. Bringing subsistence farmers into cities to work in factories has been a time-honored development formula. Increased productivity raises profits and provides higher wages, lifting the entire economy. Every emerging economy has emerged this way.

But that train seems to have gone off the rails. Today, emerging economies are being buffeted by higher interest rates in the US, lower commodity prices around the world, and a slowdown in world trade. Their managed economies have managed to produce too many factories pumping out goods that no one wants using borrowed money that no one expects to be repaid.

And corruption reigns. Crony-capitalist systems rely on influence rather than economics to get things done. And when the music stops playing and everyone grabs a chair, poor governance regimes are unlikely to respect the property rights of foreign investors.

Developing (white) and World (gold) markets. Source: Bloomberg

So rather than leading the rest of the world higher, emerging markets seem to be pulling global markets down. Currency devaluation threatens to export global deflation. Their massive foreign exchange reserves – over $10 trillion, built up after the last emerging market crisis – have begun to decline. And planners seem to be skidding from one market intervention to another: banning short sales, banning insider sales, declaring market holidays, even prosecuting reporters as market manipulators.

But the time to buy is when the blood is running in the streets. Emerging markets have been stagnant for over five years, even as stocks in the rest of the world push to new highs. Poor governance will not be sustained if these countries want to access global markets and global capital. Minsky’s dictum–every situation creates forces that lead to its own destruction—works to the upside as well as down. Mismanagement leads to new management, in countries as well as companies.

The only constant in the markets is change. And the expected rarely happens.

Douglas R. Tengdin, CFA

Chief Investment Officer

The Year of the Horse

Happy New Year!

I’m not late by 2+ months. We’re in the middle of the Chinese Spring Festival, that celebration of good fortune, wealth, and happiness that runs from the end of the last month of their year to the middle of the first month. Because the Chinese calendar is based on both the moon and the sun, the timing of their New Year shifts around, kind of like Easter.

The celebration is thousands of years old, and is marked by family reunions, parades, firecrackers, and other festivities. Every year hundreds of millions of people travel to their ancestral homes for the festival, straining China’s transportation system. Naturally all this travel affects their economy: people can’t work when they’re travelling, and factories reduce output. Capital spending tails off prior to the New Year, and reaccelerates afterwards.

Because China has a $9 trillion economy—more than half the size of the US—this has an impact on all of us. But the date changes every year, so it’s hard to model. Even so, this impact doesn’t mean their economy is slowing. Put it this way: we don’t think that our economy is taking off just because gift-buying ramps up in December; we shouldn’t forecast gloom-and-doom because Chinese spending slows in early winter.

I suspect that this may be behind some of this year’s emerging market angst. Slower output and rising loans should be expected right now. Yes, there are important underlying issues, but when the New Year’s dragon dance is taking place, it’s hard to hear the trends with all the firecrackers going off.

Douglas R. Tengdin, CFA

Chief Investment Officer

Groundhog Day?

Are the markets melting down from the bottom up? Again?

Those of us who have been in the market for a couple decades may be having a sense of déjà vu. We remember this movie. In 1998 cash shortages in some emerging markets led to capital flight which led to currency issues which led to ratings problems which led to a run on the global financial infrastructure. A small hedge fund with a couple of Nobel laureates on staff had a couple trillion dollars in notional swap exposure and the Fed engineered a takeover and recapitalization of the fund by its creditors. A global financial meltdown was averted, but things were pretty hairy for a while.

Are we on the same slippery slope? Cash issues in the “fragile five” emerging markets—Brazil, India, Indonesia, South Africa, and Turkey—have caused their currencies to tumble 15-20% over the past year. Credit downgrades are possible. All that’s needed is another hedge-fund levered 50-to-1 or 100-to-1 to announce that it is closing its doors and for a multi-trillion dollar bank like JP Morgan or Paribas to announce mega-losses and potential capital issues.

But there’s the rub. After the 1998 crisis, loans to hedge funds saw a lot more scrutiny. During the 2008 Financial Crisis, hedge funds were hardly involved, except as profit-seeking vultures that profited from the collapse in housing prices. In addition, the ’98 crisis involved currencies that had been pegged to the Dollar, then had to abruptly break that fixed ratio. The sudden disruption to their markets and economies was as much of a problem as the change in the currencies’ level.

Generals, it is said, always prepare to fight the last war. That’s why people are afraid of a real-estate bubble now, even when cash-sales predominate. Leverage is a necessary condition for a contagious bubble. When unlevered prices simply fall, they fall. Period.

Douglas R. Tengdin, CFA

Chief Investment Officer

Emerging Issues

It’s the end of January and global markets are shifting.

In the US and Europe, the stock markets have pulled back 2-3% after a very strong 2013. But emerging markets are down almost 10% after last year’s lackluster returns. What’s going on?

When the Fed announced last June that they were ready to slow the expansion of their balance sheet, emerging markets balked. They had grown accustomed to massive cash-flows from the developed world. With the Fed signaling that the era of ultra-easy money might be ending soon, those capital inflows could slow, threatening their economies.

Now the taper is happening, and some of those economies are facing a cash crunch. Argentina devalued its currency by 10%. Turkey raised its discount rate by over 4%. And emerging stock markets have sold off.

But not all emerging economies are created equal. There’s a world of difference between those with a trade surplus and excess reserves—like China, Korea, and Mexico—and those that rely on imported goods and capital to keep their economies afloat—like Argentina or Ukraine. While currently a wave of “risk-off” selling seems to have depressed them all, such waves and troughs create opportunities when investors move en masse.

In the long-run, quality wins. But sometimes it takes time for markets to differentiate between fool’s gold and the real thing.

Douglas R. Tengdin, CFA

Chief Investment Officer