Glovista Global Emerging Market Perspectives

Transcription

1 Issue 28 April/12 Monthly Newsletter for Emerging Market Investors Glovista Global Emerging Market Perspectives This issue : Emg Mkt. Sector Performance P.2 S&P 500 Sector Performance P.5 Ccv and Cmdty Performance P.6 Dr. Carlos Asilis Tel: (305) Carlos.asilis@glovista.net Darshan Bhatt, CFA Tel: (212) Darshan.bhatt@glovista.net Emerging Markets Consolidate Year to Date Gains Despite Growing Concerns over World Economic Outlook During the month of March and thus far in April, emerging equity markets have consolidated year-to-date gains despite an increasingly adverse global financial market and macro backdrop, courtesy of renewed sovereign credit concerns out of Europe. Our accompanying Glovista Global Perspectives column discusses the impact of recent global macro dynamics on risk markets. Country wise Monthly Performance in (Gross) (US$) March % 3.3% 0.4% 0.5% 4.4% Mexico Malaysia South Korea Taiwan MSCI Emg Mkts Enrique Figueroa, CFA, CFP Tel: (650) enrique.figueroa@glovista.net Figure E-1 illustrates the consolidation of year-to-date gains by emerging equity markets despite the sharp correction experienced in commodity prices (Figure E-2) and decline in the economic surprise index for major economies during the month of March and April (Figure E-3). From our perspective, that emerging equity markets have managed to sustain the strong year-to-date relative return outperformance of international developed equity market peers (Figure E-4), at a time of declining world economic growth estimates and weakening commodity prices, serves as testimony to the unique strength of emerging equity markets underlying secular dynamics, including favorable demographics, strong fiscal dynamics, sustainable productivity gains and persistently high efficiency levels in the use of capital. Unsurprisingly, the recent weakening of commodity prices and strengthening US Dollar has proved detrimental to the relative return performance for commodity-oriented 5.3% 5.8% 6.3% 6.9% 3.7% Source: MSCI & Bloomberg 1 South Africa India Russia Brazil China Glovista Investments

2 Figure E 1. Emerging Equity Markets (MXEF) Consolidate 2012 YTD Returns Sector Wise Performance (Gross) March % 1.0% 0.4% 0.3% CS IT TS HC 1.3% 3.0% 3.3% 3.6% 4.9% 7.1% 7.4% CD UT Emg Mkts IN FI MT EN Figure E 2. Correction in Commodity Prices Intensifies during 2012 YTD Period 10% 5% 0% 5% 10% Source: MSCI S markets within emerging markets, such as Brazil (Figure E-5). As noted in our prior monthly commentaries, we have maintained our emerging market equity portfolios substantially underweight commodity-oriented markets, including Brazil, Indonesia, Peru and Chile. We continue to maintain such tilts, though we recently took profits in our large underweight exposure to Brazil by reducing the 2

3 Figure E 3. Economic Surprise Indicators for Major Economies Weaken Since February Figure E 4. Emerging Equity Markets Sustain Return Outperformance versus EAFE underweight exposure. Earlier this month, we undertook several significant rebalancing actions in our emerging market equities managed portfolios. Specifically, we have taken profits in our longstanding underweight allocations to China and Brazil, by trimming the extent of our underweight exposure to Brazil and by raising our portfolios China country exposure from significant underweight to overweight. 3

4 Figure E 5. Brazilian Equities Sharply Underperform EM Peers At present, we hold significant overweight allocations to China, India, Russia, Turkey and South Africa and principal underweight allocations to Korea, Taiwan, Malaysia, Brazil, Mexico, Chile and Indonesia. At the sector level, we currently hold principal overweight allocations to energy, materials and financials. In addition, we have taken profits in our longstanding Taiwan and Turkey country overweight allocations as well as reduced our Korea country allocation. In the process, we have also raised exposure to India country factor and as well as global financials and materials sector exposures, among others. At present, we hold significant overweight allocations to China, India, Russia, Turkey and South Africa and principal underweight allocations to Korea, Taiwan, Malaysia, Brazil, Mexico, Chile and Indonesia. At the sector level, we currently hold principal overweight allocations to energy, materials and financials while in the underweight direction, we have recently shifted technology into that group while also keeping exposure to consumer staples and discretionary stocks at underweight. The rationale underpinning our latest portfolio rebalancing actions stem from valuation considerations (Russia, China and India), a constructive economic growth outlook towards the large insular macro plays in the sector (India and China), and a conscious decision to reduce the portfolio s beta to downshifts in developed economies growth expectations (e.g. Taiwan and Korea downgrades). Finally, our decision to lower our portfolios underweight factor to commodity-sensitive markets (especially, Brazil) was motivated by valuation considerations following the materials sector s massive relative underperformance that has cumulated over the past several months. Risk Markets Correct on Renewed European Debt Concerns, Investor Positioning and Weakening Macro Calendar. Glovista s Core Themes Unchanged Risk markets, spanning the equities / credit / commodities / currencies divide, have experienced considerable price corrections over the past several weeks. For example, the adjoining Figure G- 1 illustrates the magnitude of the sell-off experienced by selected pockets of the global market space since March 19th, From our perspective, we attribute the recent sell-off in risk markets to three principal factors: (1) Rekindled sovereign credit concerns in the periphery of Europe; 4

5 Figure G 1. Return Performance across Selected Global Asset Classes since March 19th, 2012 S&P500 Monthly Sector Performance Mar' 2012 Sectors % Change FY1 PE Ratio Energy 3.40% 10.9 Materials 0.13% 13.6 Industrials 1.17% 13.8 Cons Disc 4.44% 16.1 Cons Stap 3.02% 15.8 Technology 5.03% 13.8 Healthcare 4.27% 12.6 Financials Utilities 7.31% 1.02% (2) Weakening macro calendar, including in the USA and China; (3) Investor positioning suggestive of high levels of investor complacency. Telecom 1.01% 18.6 S&P % 13.5 Source: S&P The escalation of European sovereign credit concerns has led to downward revisions to European economic growth estimates and also for other regions of the world. Such considerations, together with the steady rise in measures of implied risk, have led to renewed equity market weakness globally, We address each of these dynamics immediately below. Subsequently, we sustain our standing mediumterm investment thesis calling for modest economic expansion in the USA and China during 2012, with downside macro and market tail risks still concentrated in the periphery of Europe including adverse price and volume implications of the European crisis on selected commodity markets and equity indices. European Debt Concerns Rekindled by Substantial 2011 Spanish Fiscal Slippage and Resulting Frictions within the Eurozone On March 5th, the new (Rajoy) Spanish government unleashed market concerns over the sovereign credit outlook for the periphery of Europe. Specifically, on that date the Rajoy government announced the 2011 budget deficit to have exceeded the preliminary estimates by a substantial 2.5 pct of GDP (e.g. revised 8.5 pct of GDP deficit versus a 6.0 of GDP prior estimate). In making such announcement, the Rajoy government also announced its decision to pursue a laxer than expected fiscal stance for the 2012 fiscal year, literally hours after the official signing of the new Fiscal Compact agreement by Eurozone member countries to which Spain was a signatory. In the process, such course of events fueled fundamental concerns over the credibility of the newly signed fiscal agreement. In the ensuing days and weeks, market repercussions stemming from such course of events have included the massive widening of CDS debt spreads for Spain and Italy Figure G-2. The escalation of European sovereign credit concerns has led to downward revisions to European economic growth estimates and also for other regions of the world. Such considerations, together with the steady rise in measures of implied risk, have led to renewed equity market weakness globally, especially in the Eurozone. Figure G-3 illustrates the evolution of the Eurostoxx 50 benchmark index, in US Dollar terms. The figure highlights the sharp 13.1 pct decline in the index between its March 19th year-to-date high level and this past Friday s closing level. 5

6 Figure G 2. Sovereign CDS Spreads (5 year) for Spain and Italy Mar'12 March Change Gold % Silver % Oil % EUR % JPY % GBP % CHF % CAD % AUD % BRL % MXN % Figure G 3. Eurostoxx 50 Equity Index Declines a Sharp 13.1 Percent from its March 19 th Year to Date High Level 6

7 Figure G 4. European Bank Sector Index Relative to Euro Stoxx 50 Index Recent Performance Rates March 31 st Level 1 Yr CD 0.70% 30 Yr Jumbo Mortgage 5/1 Jumbo Mortgage US Govt. 10 Year 10 Yr Swap Spread 4.57% 3.00% 2.21% 0.08% The global macro calendar these past several weeks has included notable releases of first order indicators signaling a weakening of economic momentum for the world s two major economic engines (China and the USA). Other dynamics are also serving to reinforce the ongoing contraction in equity multiples, especially for the periphery of Europe. Specifically, recent comments by high ranking officials from European periphery country governments, including Spain s central bank, suggest the standing consideration of highly dilutive banking sector recapitalization proposals. Thus, it should not be a surprise that Eurozone bank sector stocks have led the recent downturn in equity prices for the region Figure G-4. Recent Releases Post Weakening of Growth Momentum for the World s Two Major Engines: China and the USA The global macro calendar these past several weeks has included notable releases of first-order indicators signaling a weakening of economic momentum for the world s two major economic engines (China and the USA). Specifically, some of these releases include the latest US monthly employment report, US Industrial Production data and manufacturing PMI new orders component for China. In addition, recent releases out of several large emerging market economies, including Brazil, India and other countries have come out below consensus estimates. For example, Figure G-5 illustrates such weakening in economic releases, versus consensus estimates. Despite Recent Price Declines in Global Equities, Stretched Bullish Investor Sentiment Levels Warrant Cautious Stance Global equities, as represented by the MSCI AC World index, have declined a little over 3 pct from the March 20th year-to-date high levels. Notwithstanding such pullback in global equities, multiple indicators of investor sentiment point to high levels of complacency. Some of those indicators include the VIX implied equity index volatility indicator (Figure G-6), the CBOE put-call ratio (Figure G-7) and stretched net long S&P500 equity index betas for large global macro hedge funds as well as US long short equity hedge funds. 7

8 Figure G 5. Weakening Economic Surprise Momentum in Emerging Markets Figure G 6. VIX Implied Equity Volatility Index Suggests Investor Complacency 8

9 Glovista Raises Portfolios Defensive Orientation Against a Backdrop of Renewed Sovereign Credit Concerns, Looming Policy Risks and Challenging Investor Positioning At the asset class level, we have lowered overall equity market exposure and raised high grade bond market exposure levels. Within equities, we continue to overweight Japan and the USA as well as selected emerging markets. Over the past few weeks, the Glovista investment team has raised our managed portfolios defensive orientation both at the asset class level (cash, fixed income, equities, commodities) as well as within risk asset classes themselves (especially within equities). The macro and market considerations underpinning such tightening of our investment thesis defensive orientation have been discussed above: (1) renewed sovereign credit concerns out of Europe; (2) challenging investor positioning, and (3) looming policy risks as the US Fed s sponsored twist and shout liquidity program comes to an end in June and as various European countries face elections, including Greece, France and Germany. At the asset class level, we have lowered overall equity market exposure and raised high grade bond market exposure levels. Within equities, we continue to overweight Japan and the USA as well as selected emerging markets. We continue to hold a constructive medium-term outlook towards risk asset classes, including equities, on the back of a constructive macro outlook for the USA, Japan, Germany and emerging markets. However, we believe markets have yet to downsize GDP growth estimates a notch for several regions and until they do so, positioning conditions and economic surprise factors are likely to keep equity markets within a tight range in the best case scenario. Figure G 7. Put Call Ratio Levels Consistent with High Levels of Investor Complacency 9

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