In Emerging Markets The Only Constant is Change

Antoine van Agtmael, the man who coined the term “emerging markets,” was a pioneer. His firm Emerging Markets Management was founded in 1988 to provide institutions access to what was at that time a very small emerging markets asset class, with fewer than 20 companies with revenues over $1 billion, almost all of them either banks or commodity producers. In his book, The Emerging Markets Century (2007), van Agtmael stressed the violent pace of change for the asset class. Fifteen years after launching the fund, 80% of the largest 100 companies had disappeared from the list. Not one of the top ten most valuable stocks remained 15 years later. Several factors drove this revolution, according to van Agtmael.

  • The move of China, Russia and Eastern Europe from centrally-planned to market-oriented economies and their integration into the global economy through trade and investments.
  • A neo-liberal wave of privatizations across emerging markets, leading to private investment in energy, telephone and power companies and a wave of public listings.
  • Improved economic policies and lower tariffs (The Washington Consensus), resulting in the control of hyperinflation in Argentina and Brazil, fiscal discipline and deleveraging in Asia and trade expansion.

The chart below  lists the top ten most valuable emerging market stocks in 1990 and 2005, taken from van Agtmael’s book. I have added the current standings, as of July 2017.

 

These lists give us several valuable insights on emerging markets investing.

  • Change is constant. The “revolution” continues. The 1990 list was dominated by Taiwan which was at the top of an epic stock market bubble. The 2005 list is dominated by commodity stocks, propped up by the China-induced commodity bubble. The current list is all China and tech. Emerging markets have their own version of FANG (Facebook, Apple, Netflix, Google), which is BATS (Baidu, Alibaba, Tencent, Samsung).
  • The drivers cited by van Agtmael have lost traction. We are seeing a backlash against neo-liberal reforms and globalization, and few privatizations. Countries with large domestic markets to protect and exploit are now seen to have the advantage.
  • Bubbles in specific geographies or segments can have a huge impact on performance. The 1990 list coincides with the peak of the great Taiwan bubble. Bubbles in Mexico (1992), Malaysia (1996), Brazil (1997), Korea (2005) had similar distortionary effects on the rankings. Same for the  commodity bubble (2005-2010), which rules the 2005 list. The 2017 list is greatly impacted by the current boom in tech stocks. There seems to always be a major bubble brewing somewhere in emerging markets.
  • There are fewer changes between the 2017 list and the 2005 list than there were between 2005 and 1990, with four stocks remaining on the list. All of the surviving stocks are either China or tech related, which may indicate we are seeing long-term secular shifts happening.
  • The expansion of China in general and China and tech in particular seem inexorable. Or are they? Only time will tell. Of the 2017 top ten, eight are essentially Chinese stocks, as Naspers’s value is mainly in its holdings in Tencent and Hon Hai’s operations are mainly based in China. Only Samsung and TSMC are independent of China. China’s market weight is likely to grow further, as its economy grows above the global average and benchmark indices include more Chinese stocks.
  • India’s absence is noteworthy. If the current hype on India is justified, ten years from now we will likely see a few Indian names on the list.

 

Us Fed watch:

Brazil Watch :

India Watch:

  • The Indian economy; a tale of two narratives (Livemint)
  •  Indian market can triple over the next five years (Wisdom Tree)

China Watch:

  • China broad credit growth slows to zero (Variant Perception)
  • Making sense of China’s foreign M&A (McKinsey)
  • Zombies are dragging down China’s productivity (Bloomberg)
  • The CEO guide to China (McKinsey)
  • The Chinese bought $32 billion in U.S. residential real estate in 2016 (WSJ)
  • Xi’s Tiger Hunt (Sinocism)

China Technology Watch:

  • Chinese military drones gaining foreign markets at U.S. expense (WSJ)
  • JD.COM invests in drone delivery (China Daily)

China Consumer Watch:

  • Chinese have all the appliances they need (SCMP)
  • China’s Hisense wins sponsorship for FIFA 2018 (China Daily)

Eastern Europe Watch:

  • Poland is breaking out of the Middle-Income Trap (NY Times)

Technology Watch:

  • The return of basic sewing manufacuring to the U.S. ((FT)
  • Are robots the future of global finance (UBS)

EM Investor Watch:

Investor Watch:

Notable Charts: