Emerging Markets Diary - February 2017
Read Leigh’s regular blog and keep up to date with the current thinking of the London-based portion of our Emerging Markets team, as they analyse the latest developments and draw on first-hand observations from their travels across the globe.
Headlines this month:
- Emerging market (EM) equities continued to steadily move upwards in February.
- Our team visited Brazil, the largest country overweight in our EM portfolios, to revisit the investment thesis.
- The Frontier Markets Equity team, meanwhile, visited Vietnam, a market undergoing significant change.
Emerging market equities continued to steadily move upwards in February, with the MSCI Emerging Markets Index gaining +3.1% for the month, which leaves it up +8.7% for the year-to-date.
The region’s best performers in 2016 were Brazil and Russia, both of which have performed quite differently so far in 2017, with Brazil one of the best performing emerging market up +15.6% by the end of February, while Russia ranks the lowest, returning -6.6%. A reduction of Trump/sanctions-related excitement and a stalling oil price have been working against Russia.
The Brazilian market suffered a small setback post Trump’s election victory, but it has since continued to power ahead, now over 100% above the lows of January 2016. Last year, our portfolios benefited from the strong overweight position that had been built up in Brazil, but also from solid stock selection. Today it remains our largest country overweight, so we need to consider closely how long we let that run for. The team were in Brazil again two weeks ago to revisit the investment thesis for the country and our key holdings.
From a macro point of view, the economy is still not growing, although we saw a few green shoots that we believe should enable some growth to return in 2018. Inflation is falling and the rate-cutting cycle is in full swing, which should benefit earnings of levered companies even without top line growth. Corruption revelations are still a threat, but the government should be able to pass pension reform which will be the key focus for the coming months.
Overall the team came back with a positive view, but noted that headline multiples are looking quite expensive on a short-term view and some correction would not be a big surprise. On a longer term view, companies should be able to deliver solid earnings growth as Brazil comes out of the worst recession in its history.
Our key holdings in the consumer and financials space continue to perform strongly –meetings with management teams added to conviction.
MSCI Brazil - Consensus 12-month Forward PIE
Source: MSCI, Thomson Reuters Datastream, Bradesco BBI
The Frontier Markets Equity team were in Vietnam recently, a market undergoing significant change where stocks have performed strongly. It’s one of the largest positions within our Frontier markets equity portfolios. Portfolio Manager, Oliver Bell, noted that the conference was overwhelmed with nearly 200 foreign investors and 200 locals, a sharp contrast to three years ago (which is often a warning sign for us).
Things on the ground felt good, consumer confidence is high, economic growth remains robust and the banking sector has mostly cleaned up its problems (there was a property market crash in 2012). Vietnam’s growth model is more tied in to exports than most other frontier markets, with foreign direct investment (FDI) strong. The FDI sector accounted for 71% of total exports in 2015, according to the Ministry of Industry and Trade1.
The demise of the Trans-Pacific Partnership was unfortunate, but we believe trade risks for Vietnam are at the lower end of the scale as labour costs remain extremely attractive. Post trip, Oliver continues to have broad exposure to Vietnam, and although conscious that risks are rising, will keep his overweight exposure for now. We are looking to tilt a little more towards the consumer sector and are working on several ideas.
1 “Socio-economic situation in 2015”, General Statistics Office of Vietnam
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.