Post by Fletchsmile on Aug 20, 2015 22:43:23 GMT 7
Some thoughts with EMs hitting multi year lows
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Is it all over for emerging markets?
Once upon a time there was an Economic Super-Cycle, with commodity prices rising at a staggering pace, and mining and oil company shareholders lived happily ever after. During this time, emerging markets were the only place to be. The rich mineral resources and abundant cheap labour were creating great wealth, enabling the emergence of vast new middle classes.
Of course, things haven't worked out as smoothly as planned.
What's impacting emerging markets?
First, the price of oil collapsed following OPEC's unwillingness to manage oil supplies. Meanwhile, China, the ever-expanding engine of global growth, has slowed. Official statistics suggest growth of 7%, but other pointers, like electricity consumption and freight traffic, suggest otherwise.
Now newer forces are beginning to further hinder progress. Emerging market currencies, from the Brazilian real to the Russian ruble are weakening rapidly. Some leading emerging nation currencies have hit fifteen-year lows recently. This raises the cost of imports, squeezing citizens' real incomes.
The prospect of higher interest rates in the USA may be driving this, with investors exiting developing nations in favour of higher expected returns closer to home. The IIF (Institute for International Finance) described portfolio flows by international investors out of these regions as a key driver behind a perfect storm facing emerging markets.
The IIF also pointed out that global trade has slowed sharply since the financial crisis. Growth rates of 7% were previously typical for international goods trade, but things have been much more sluggish since, measuring just 1.5% growth over the last year.
Impact for UK companies
UK companies are not immune. We are beginning to see more and more companies experiencing difficult trading conditions in once rampant emerging markets. Often, this is due to a commodity exposure, but some weakness is being reported by consumer markets in the developing nations too.
So, should investors run for the door and sell stocks with emerging market exposure? That could be a case of slamming the stable door, long after the horse has bolted. In many cases, these concerns are already priced in.
Take Burberry for example. Like other luxury goods companies, it has seen strong growth in demand from Asian, Middle Eastern and Russian consumers in recent years. The share price has fallen over 15% since the spring as concerns over slower Chinese demand emerged.
Or drinks giant Diageo, which has been steadily lagging the wider market for almost three years as slower sales growth sapped investor confidence, leading to the company recently being suggested as vulnerable to takeover.
It's not all bad news
Not all stocks with emerging market consumer exposures have been falling.
Unilever is still close to its highs, as is British American Tobacco (BATS). They have shown good underlying performance, and in Unilever's case, its emerging market exposures still delivered twice the growth seen in its developed market positions . BATS, which earns most of its money in developing nations is still able to raise prices faster than volumes are declining, recording pricing gains of 5.3% at the half-year stage.
Reckitt Benckiser too, is still generating rapid growth from developing nations, recording 7% top-line growth from the developing nations in the first half of this year. Margins are much lower, outside of Europe and North America, leaving the potential for catch-up in the future.
So it's not a uniform story for the higher risk emerging markets. Commodity exporters like Russia look set for the hardest ride, whilst China could begin to see its economy gaining from vastly lowered import bills for energy, metals and minerals. I believe, the long-term potential of emerging markets to deliver above-average rates of growth still seems good, although there are no guarantees. Perhaps investors should be patient and look for opportunities to increase holdings, if the market throws up bargains from time to time.
www.hl.co.uk/news/articles/is-it-all-over-for-emerging-markets?utm_source=Silverpop&utm_medium=email&utm_campaign=E00MR_Daily%20update_open%20no%20video%20no%20tips%20(1)&utm_content=www_hl_co_uk_news_articles_is_&theSource=E00MR&Override=1&sp_mid=49361514&sp_rid=ZmxldGNodGhhaTY4QHlhaG9vLmNvbQS2
----------------------------------------------------------
Is it all over for emerging markets?
Once upon a time there was an Economic Super-Cycle, with commodity prices rising at a staggering pace, and mining and oil company shareholders lived happily ever after. During this time, emerging markets were the only place to be. The rich mineral resources and abundant cheap labour were creating great wealth, enabling the emergence of vast new middle classes.
Of course, things haven't worked out as smoothly as planned.
What's impacting emerging markets?
First, the price of oil collapsed following OPEC's unwillingness to manage oil supplies. Meanwhile, China, the ever-expanding engine of global growth, has slowed. Official statistics suggest growth of 7%, but other pointers, like electricity consumption and freight traffic, suggest otherwise.
Now newer forces are beginning to further hinder progress. Emerging market currencies, from the Brazilian real to the Russian ruble are weakening rapidly. Some leading emerging nation currencies have hit fifteen-year lows recently. This raises the cost of imports, squeezing citizens' real incomes.
The prospect of higher interest rates in the USA may be driving this, with investors exiting developing nations in favour of higher expected returns closer to home. The IIF (Institute for International Finance) described portfolio flows by international investors out of these regions as a key driver behind a perfect storm facing emerging markets.
The IIF also pointed out that global trade has slowed sharply since the financial crisis. Growth rates of 7% were previously typical for international goods trade, but things have been much more sluggish since, measuring just 1.5% growth over the last year.
Impact for UK companies
UK companies are not immune. We are beginning to see more and more companies experiencing difficult trading conditions in once rampant emerging markets. Often, this is due to a commodity exposure, but some weakness is being reported by consumer markets in the developing nations too.
So, should investors run for the door and sell stocks with emerging market exposure? That could be a case of slamming the stable door, long after the horse has bolted. In many cases, these concerns are already priced in.
Take Burberry for example. Like other luxury goods companies, it has seen strong growth in demand from Asian, Middle Eastern and Russian consumers in recent years. The share price has fallen over 15% since the spring as concerns over slower Chinese demand emerged.
Or drinks giant Diageo, which has been steadily lagging the wider market for almost three years as slower sales growth sapped investor confidence, leading to the company recently being suggested as vulnerable to takeover.
It's not all bad news
Not all stocks with emerging market consumer exposures have been falling.
Unilever is still close to its highs, as is British American Tobacco (BATS). They have shown good underlying performance, and in Unilever's case, its emerging market exposures still delivered twice the growth seen in its developed market positions . BATS, which earns most of its money in developing nations is still able to raise prices faster than volumes are declining, recording pricing gains of 5.3% at the half-year stage.
Reckitt Benckiser too, is still generating rapid growth from developing nations, recording 7% top-line growth from the developing nations in the first half of this year. Margins are much lower, outside of Europe and North America, leaving the potential for catch-up in the future.
So it's not a uniform story for the higher risk emerging markets. Commodity exporters like Russia look set for the hardest ride, whilst China could begin to see its economy gaining from vastly lowered import bills for energy, metals and minerals. I believe, the long-term potential of emerging markets to deliver above-average rates of growth still seems good, although there are no guarantees. Perhaps investors should be patient and look for opportunities to increase holdings, if the market throws up bargains from time to time.
www.hl.co.uk/news/articles/is-it-all-over-for-emerging-markets?utm_source=Silverpop&utm_medium=email&utm_campaign=E00MR_Daily%20update_open%20no%20video%20no%20tips%20(1)&utm_content=www_hl_co_uk_news_articles_is_&theSource=E00MR&Override=1&sp_mid=49361514&sp_rid=ZmxldGNodGhhaTY4QHlhaG9vLmNvbQS2
