Gavin Graham, Global Strategist at Excel Funds, speaks about Emerging Markets
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Uploaded by excelfundscom on 01.02.2011
Transcript:
>>Gavin Graham: I’m here as global strategies for Excel to in essence
to talk about the case for investing in emerging markets.
I’m sure most of you are familiar with it.
But there one or two interesting details that you may not be aware of.
Of every 100 persons adding to the global population in the coming decade,
97 will be in emerging markets.
And this is a map of world countries based on their population
which is why India looks like a pregnant whale.
But the fact is that demography drives markets.
If you have growing populations you will have growth.
And growth makes it much easier for companies to make decent returns.
But I’m talking about growth,
also how is that growth been reflected in investment performance.
The opportunity that infrastructure presents within the emerging markets.
The risk profile because a lot of people go,
“It’s fine to say emerging markets so this great opportunity
and have this strong growth, Gavin.
But aren’t’ they risky; aren’t they too volatile.”
And lastly, what the outlook might be?
This is probably a familiar slide to lots of you. It’s called the S-curve.
On the vertical axis, you have the gross national income per capita.
And on the horizontal axis is the years of economic development;
and that’s 50, 100, 150 longer even that I’ve been in the markets.
What you can see is that at the top of the S you have wealthy countries
like the US and France and Italy and the UK,
which have had economic growth that has lasted for 200, 250, 300 years.
At the bottom of the S-curve you have poor countries
where economic growth has only been growing for 20, 30, 40 years.
And as the process of economic growth continues you move up the S-curve.
It’s fairly straight forward.
But you can see that there are a couple of countries
like for example South Korea, and Mexico, and Russia
which are moving up into the developed world, into the group of developed economies.
And then there are of course the two biggest, China and India, which are starting that process.
In effect, they’ve really only been going for 100 years or so.
Some would make the argument only for the last 35 to 40 years.
That process continues and does not stop.
At the moment, the emerging economies have,
and I’m sure you’re probably familiar with these numbers,
80% of the world’s population,
70% of the world’s foreign exchange reserves, maybe you weren’t aware of that.
75% of the world’s landmass, only 34% of the world’s GDP
because they’re developing;
because the wealthy countries have the majority of world GDP.
But their stock market capitalization is only 13%.
Even if they were just to actually reflect the share of world GDP,
they would almost triple from where they are now.
Let’s be conservative and say they merely doubled.
You can see that if the stock market capitalizations are going to reflect
their share of world output, you should see substantial growth in these markets.
And indeed you have seen substantial growth in these markets
because as a Canadian investor you have made no money at all
in developed markets for the last 10 years.
This is the blue line at the bottom is the MSCI world index in Canadian dollar terms.
And the red line at the top, guess what,
it’s the MSCI Emerging Market Index in Canadian dollar terms.
You’ve more than doubled your money in emerging markets
through two horrendous bear markets in the developed world;
partially cause emerging markets were cheap 10 years ago
and develop markets were expensive
but also because they have growth.
And that is likely to continue, I would put it to you, for the next 10 years.
Maybe this disparity in returns will not be as great
because now developed markets are reasonably valued as indeed are emerging markets.
They’re approximately the same evaluation mid teens, PE’s.
But the growth you’re getting from the emerging markets is substantially higher.
In fact, if you look at the share of world GDP growth over the last dozen years or so,
the majority has come from, guess where, developing markets.
Two-thirds of world economic growth in the last few years has come from developing markets.
Because they have much better fundamentals.
They have much better balance sheets.
They have much younger populations.
And it’s likely, one would suggest, to continue that way.
Infrastructure, I mentioned, well here’s a $6 trillion opportunity, just in the emerging markets.
Although of course, there’s plenty of infrastructure that also needs to be look after in the developed markets.
But if you look at the individual countries, China had its stimulus program a couple of years ago, $586 billion.
The vast majority of which was spent on infrastructure.
Interestingly, their shovel ready project actually got built of how that happens.
India is spending $0.5 trillion on infrastructure and plans to double that from 2016 over the next 5 years.
Russia is intending to spend $1 trillion on its infrastructure by 2020.
Brazil has got both the World Cup and the Olympics and is spending,
under its new President Dilma Roussef, who won 55% of the vote in the weekend as Lula's successor,
almost a trillion dollars, $878 billion.
There is enormous domestic growth which will not be dependent on exports
to a slow growing developed world coming just from the infrastructure projects alone.
So if we were and of course it’s a great mistake in the scheme of things
to extrapolate the development until the last few years in a straight line
but we all do let’s face it. We’re human after all.
If you were to take where the US is now which is about $14.5 trillion in GDP
and extrapolate it’s growth rate through to 2050, it would grow by about 2.6 times.
If you were to take China or India, Chindia, each is about a third
$5.9 trillion, $6 trillion as opposed to $14.5 trillion for the US
and extrapolate its growth rate over the last few years
it would grow by 18.3 times and would end up being three times as large as the US.
Now, they will obviously not continue to growth at the same rate
because the easier start is starting from a lower base.
But the fact is that any realistic estimate of how big this economies are going to be
within the next 20 to 30 years indicates in absolute terms
they will be as large as or larger than the US.
And by the way, they’re doing it without too much debt to help them along
because they went there a dozen years ago.
They had the Asian crisis. They had the Russian debt default.
They’ve been there. They’ve done that.
They’ve got the t-shirt, which is probably made in China by the way.
If you look at the percentage of debts government debt to GDP this year,
what’s the country on the right hand side with the lowest number? Oh, look it’s China.
What’s the number with the highest bar on the left?
Oh, look it’s Japan, where the demographics are dreadful and the population is already shrinking.
Next to it is Greece and Italy and the US and Canada
doesn’t necessarily mean that it’s a problem if you have high debt to GDP
as long as you have the revenue to service it.
But you’ll notice all the countries on the right hand side
are developing countries with much lower levels of debt.
They’re not doing this through gearing.
And the consumer, is way less indebted because you haven’t had credit cards.
You haven’t had mortgages. You haven’t had car loans.
And this is wonderful business for the banks because it’s nice and straightforward
and you verify their income and you make them put down a substantial deposit.
All that boring old-fashioned blocking and tackling
that nobody was doing with subprime mortgages for example.
Banking in developing economies is a nice easily understandable steady business
and doesn’t need to have lots and lots of derivatives
and things that you cannot analyze as opposed to the indebted Western European and US consumer.
Now, people say “Ah, these are all fine, Gavin and it’s a wonderful story but its way too volatile.”
Compared to what?
Here’s the standard deviation of the MSCI emerging markets index on the right hand side
compared to on the left the world index, the TSX and EAFE, the non-North American developed markets.
Guess what, emerging markets are no more volatile
than developed markets over the last five years.
And that’s not just taking the last three years when we had the crisis.
It’s taking a couple of years when things look fairly normal.
The volatility from emerging markets as their strength has increased,
as their finances had improved, as the transparency has increased
is no greater than developed markets
and lower the non-North American developed markets.
So please do not say I will not invest in emerging markets because they’re too volatile
because obviously that means you won’t invest in any markets outside of Canada, will you?
I don’t think so.
And then, by the way, you made some money in these markets.
Here’s the last five years returns.
You made 62% as opposed to losing 2.5% in the MSCI world index
and only making 0.5 % in the EAFE index compound.
Interestingly, Canada has been the only developed market along with Australia
that’s made reasonable returns because their resource exposure
is a play on the growth in emerging markets.
So, if you were to look at the relative market capitalizations at the moment,
It’s about $14 billion for emerging market against $30 billion for developed.
By 2020, if you continue the same growth rate, it would be 37 against 46.
And they would be larger by 2050, 2030, I’m sorry.
So if you look at 2030, and these are Goldman Sachs numbers,
emerging markets will actually be the largest markets in the world by market cap.
Finishing up, and how glad you are to hear that,
if you were to take countries with the list of characteristics on the left hand side
and blank out the total as opposed to the countries on the right hand side,
which of those countries would you choose?
Would you choose the ones with high GDP growth, and increasing employment,
and the young population, and a low debt,
and strong banks, and a growing middle class,
an appreciating currency and high flows into them,
or would you choose the opposite?
Because that’s what you have with emerging markets as opposed to developed markets.
Not to over-egg this but the fact is the fundamentals are way better
and you can get them for the same price.
So conclusion is that you should ask an investor to have a meaningful exposure
to emerging markets in your non-Canadian exposure.
Because first of all it’s been the right call over the last few years
and will continue to be the right call for the same reasons.
The better fundamentals, natural resources,
economic reform and change, transparency,
better credit quality, all those wonderful things.
And now I have to tell you how do I actually play this;
to describe how Excel goes about running the funds that are giving you this exposure,
I’d like to introduce Paul Mesburis.
He is Senior Portfolio Manager and Chief Compliance Officer at Excel with 15 years experience.
�
to talk about the case for investing in emerging markets.
I’m sure most of you are familiar with it.
But there one or two interesting details that you may not be aware of.
Of every 100 persons adding to the global population in the coming decade,
97 will be in emerging markets.
And this is a map of world countries based on their population
which is why India looks like a pregnant whale.
But the fact is that demography drives markets.
If you have growing populations you will have growth.
And growth makes it much easier for companies to make decent returns.
But I’m talking about growth,
also how is that growth been reflected in investment performance.
The opportunity that infrastructure presents within the emerging markets.
The risk profile because a lot of people go,
“It’s fine to say emerging markets so this great opportunity
and have this strong growth, Gavin.
But aren’t’ they risky; aren’t they too volatile.”
And lastly, what the outlook might be?
This is probably a familiar slide to lots of you. It’s called the S-curve.
On the vertical axis, you have the gross national income per capita.
And on the horizontal axis is the years of economic development;
and that’s 50, 100, 150 longer even that I’ve been in the markets.
What you can see is that at the top of the S you have wealthy countries
like the US and France and Italy and the UK,
which have had economic growth that has lasted for 200, 250, 300 years.
At the bottom of the S-curve you have poor countries
where economic growth has only been growing for 20, 30, 40 years.
And as the process of economic growth continues you move up the S-curve.
It’s fairly straight forward.
But you can see that there are a couple of countries
like for example South Korea, and Mexico, and Russia
which are moving up into the developed world, into the group of developed economies.
And then there are of course the two biggest, China and India, which are starting that process.
In effect, they’ve really only been going for 100 years or so.
Some would make the argument only for the last 35 to 40 years.
That process continues and does not stop.
At the moment, the emerging economies have,
and I’m sure you’re probably familiar with these numbers,
80% of the world’s population,
70% of the world’s foreign exchange reserves, maybe you weren’t aware of that.
75% of the world’s landmass, only 34% of the world’s GDP
because they’re developing;
because the wealthy countries have the majority of world GDP.
But their stock market capitalization is only 13%.
Even if they were just to actually reflect the share of world GDP,
they would almost triple from where they are now.
Let’s be conservative and say they merely doubled.
You can see that if the stock market capitalizations are going to reflect
their share of world output, you should see substantial growth in these markets.
And indeed you have seen substantial growth in these markets
because as a Canadian investor you have made no money at all
in developed markets for the last 10 years.
This is the blue line at the bottom is the MSCI world index in Canadian dollar terms.
And the red line at the top, guess what,
it’s the MSCI Emerging Market Index in Canadian dollar terms.
You’ve more than doubled your money in emerging markets
through two horrendous bear markets in the developed world;
partially cause emerging markets were cheap 10 years ago
and develop markets were expensive
but also because they have growth.
And that is likely to continue, I would put it to you, for the next 10 years.
Maybe this disparity in returns will not be as great
because now developed markets are reasonably valued as indeed are emerging markets.
They’re approximately the same evaluation mid teens, PE’s.
But the growth you’re getting from the emerging markets is substantially higher.
In fact, if you look at the share of world GDP growth over the last dozen years or so,
the majority has come from, guess where, developing markets.
Two-thirds of world economic growth in the last few years has come from developing markets.
Because they have much better fundamentals.
They have much better balance sheets.
They have much younger populations.
And it’s likely, one would suggest, to continue that way.
Infrastructure, I mentioned, well here’s a $6 trillion opportunity, just in the emerging markets.
Although of course, there’s plenty of infrastructure that also needs to be look after in the developed markets.
But if you look at the individual countries, China had its stimulus program a couple of years ago, $586 billion.
The vast majority of which was spent on infrastructure.
Interestingly, their shovel ready project actually got built of how that happens.
India is spending $0.5 trillion on infrastructure and plans to double that from 2016 over the next 5 years.
Russia is intending to spend $1 trillion on its infrastructure by 2020.
Brazil has got both the World Cup and the Olympics and is spending,
under its new President Dilma Roussef, who won 55% of the vote in the weekend as Lula's successor,
almost a trillion dollars, $878 billion.
There is enormous domestic growth which will not be dependent on exports
to a slow growing developed world coming just from the infrastructure projects alone.
So if we were and of course it’s a great mistake in the scheme of things
to extrapolate the development until the last few years in a straight line
but we all do let’s face it. We’re human after all.
If you were to take where the US is now which is about $14.5 trillion in GDP
and extrapolate it’s growth rate through to 2050, it would grow by about 2.6 times.
If you were to take China or India, Chindia, each is about a third
$5.9 trillion, $6 trillion as opposed to $14.5 trillion for the US
and extrapolate its growth rate over the last few years
it would grow by 18.3 times and would end up being three times as large as the US.
Now, they will obviously not continue to growth at the same rate
because the easier start is starting from a lower base.
But the fact is that any realistic estimate of how big this economies are going to be
within the next 20 to 30 years indicates in absolute terms
they will be as large as or larger than the US.
And by the way, they’re doing it without too much debt to help them along
because they went there a dozen years ago.
They had the Asian crisis. They had the Russian debt default.
They’ve been there. They’ve done that.
They’ve got the t-shirt, which is probably made in China by the way.
If you look at the percentage of debts government debt to GDP this year,
what’s the country on the right hand side with the lowest number? Oh, look it’s China.
What’s the number with the highest bar on the left?
Oh, look it’s Japan, where the demographics are dreadful and the population is already shrinking.
Next to it is Greece and Italy and the US and Canada
doesn’t necessarily mean that it’s a problem if you have high debt to GDP
as long as you have the revenue to service it.
But you’ll notice all the countries on the right hand side
are developing countries with much lower levels of debt.
They’re not doing this through gearing.
And the consumer, is way less indebted because you haven’t had credit cards.
You haven’t had mortgages. You haven’t had car loans.
And this is wonderful business for the banks because it’s nice and straightforward
and you verify their income and you make them put down a substantial deposit.
All that boring old-fashioned blocking and tackling
that nobody was doing with subprime mortgages for example.
Banking in developing economies is a nice easily understandable steady business
and doesn’t need to have lots and lots of derivatives
and things that you cannot analyze as opposed to the indebted Western European and US consumer.
Now, people say “Ah, these are all fine, Gavin and it’s a wonderful story but its way too volatile.”
Compared to what?
Here’s the standard deviation of the MSCI emerging markets index on the right hand side
compared to on the left the world index, the TSX and EAFE, the non-North American developed markets.
Guess what, emerging markets are no more volatile
than developed markets over the last five years.
And that’s not just taking the last three years when we had the crisis.
It’s taking a couple of years when things look fairly normal.
The volatility from emerging markets as their strength has increased,
as their finances had improved, as the transparency has increased
is no greater than developed markets
and lower the non-North American developed markets.
So please do not say I will not invest in emerging markets because they’re too volatile
because obviously that means you won’t invest in any markets outside of Canada, will you?
I don’t think so.
And then, by the way, you made some money in these markets.
Here’s the last five years returns.
You made 62% as opposed to losing 2.5% in the MSCI world index
and only making 0.5 % in the EAFE index compound.
Interestingly, Canada has been the only developed market along with Australia
that’s made reasonable returns because their resource exposure
is a play on the growth in emerging markets.
So, if you were to look at the relative market capitalizations at the moment,
It’s about $14 billion for emerging market against $30 billion for developed.
By 2020, if you continue the same growth rate, it would be 37 against 46.
And they would be larger by 2050, 2030, I’m sorry.
So if you look at 2030, and these are Goldman Sachs numbers,
emerging markets will actually be the largest markets in the world by market cap.
Finishing up, and how glad you are to hear that,
if you were to take countries with the list of characteristics on the left hand side
and blank out the total as opposed to the countries on the right hand side,
which of those countries would you choose?
Would you choose the ones with high GDP growth, and increasing employment,
and the young population, and a low debt,
and strong banks, and a growing middle class,
an appreciating currency and high flows into them,
or would you choose the opposite?
Because that’s what you have with emerging markets as opposed to developed markets.
Not to over-egg this but the fact is the fundamentals are way better
and you can get them for the same price.
So conclusion is that you should ask an investor to have a meaningful exposure
to emerging markets in your non-Canadian exposure.
Because first of all it’s been the right call over the last few years
and will continue to be the right call for the same reasons.
The better fundamentals, natural resources,
economic reform and change, transparency,
better credit quality, all those wonderful things.
And now I have to tell you how do I actually play this;
to describe how Excel goes about running the funds that are giving you this exposure,
I’d like to introduce Paul Mesburis.
He is Senior Portfolio Manager and Chief Compliance Officer at Excel with 15 years experience.
�