We publish the analysis by Didier Rabattu and Odile Lande-Broussy, management team of the LO Funds Emerging Consumer fund of Lombard Odier Investment Managers.
Investors in emerging markets have recently had to face one of the worst periods in two decades in terms of negative performance relative to developed markets.
Risk management, macro exposure and stock selection are the three key factors in managing such complex situations. It is known that in times of crisis, emerging currencies have a strong correlation with each other. Consequently, each relevant position in developing countries, and the related risk, is linked to exposure to different currencies.
It is therefore very important to have a solid investment methodology, so as to evaluate factors such as a company's corporate governance, leadership in specific sectors, a business that involves a high return on capital and a very low level of debt. Furthermore, it should not be forgotten that emerging markets, by their nature, are mostly small in size and have specific dynamics.
Today, however, the big question mark concerns the possible destination of the outstanding liquidity, with the global bond market in decided difficulty after a nearly thirty-year bull run.
Speaking of emerging markets, an interesting interpretation is that of consumption. The population of developing countries, amounting to five billion people, is evidently growing faster than in the developed world, with long-term rates similar to those recorded in Europe and the US in the postwar years.
However, a clarification is needed, an element that many investors often forget: the emerging world is not a single market, let alone a homogeneous one. This applies to both market performance and economic fundamentals. We can tentatively consider six large areas: China, South-East Asia, India, Africa and the Middle East, Eastern Europe and Latin America. In each of these areas the dynamics are very different, the countries do not grow at the same pace or in the same direction and even within these same blocks there are significant differences.
Let's take Vietnam for example: despite being geographically very close to Thailand, it is very distant from it, both economically and politically, while Chile is the economic and political opposite of Argentina, despite having a common border, and Saudi Arabia has really little to share with neighboring Egypt.
If on the one hand we must therefore be careful of diversity, we must also consider that there are sufficient points in common. Southeast Asia (Thailand, Malaysia, Philippines, Vietnam, Indonesia) is experiencing a boom thanks to the well-balanced growth of recent years. In fact, it has a debt / GDP ratio under control, solid local capital, secure financial institutions, a good balance between infrastructure, consumption and exports and a reduction in corruption at all levels.
Chile, Colombia, Peru, Poland, Turkey are also part of this group, while Brazil, Argentina, South Africa and Ukraine are excluded and are susceptible to problems of various kinds.
What happens instead in India? GDP growth of 5% follows the trend of its neighbors, but despite the decline in gold, oil and consumer goods prices, inflation and interest rates remain high. However, the current account deficit is not high and once again in the coming months the country will have to find the right balance between the metric variables. In practice, the steady increase in population that accompanies greater well-being is in line with what the United States and Europe experienced in the postwar period. Likewise, expansion in the food & beverage, supermarket and restaurant sectors is expected for these markets.
Emerging governments, chief among them that of China, must expand their economies by encouraging the growth of the nascent middle classes. Just as is the case for today's developed countries, consumption will be the most important driver of growth in emerging markets for the next few decades. Exports per se will no longer be sufficient, since Europe and the United States cannot be outlet markets indefinitely, and infrastructures are exaggeratedly expensive in the short term.
Hygiene, for example, is a clear priority for all governments and the Chinese one in particular is eager to clean up the entire chain of consumption, starting from the growers up to the sellers. Scandals in the dairy, baby food, pork and chicken sectors are forcing the government to push for a complete modernization in the food sector.
Again, just take a look at recent history to realize what happened in Europe and the United States between the end of World War II and the late 80s.
