Are Emerging Markets Really the Answer? 9 February 2012
Bill Smith Chief Executive Officer, UK
Agenda A. History and fundamentals of emerging markets B. The case for diversification C. The ever expanding universe D. Conclusion
Emerging Markets
More than 80% of the world’s population
75% of the world’s landmass
75% of FX reserves
50% of GDP
65% of GDP Growth
Only 13% of the world’s equity market capitalisation As of 31 December 2010 Source: Lazard
The World in Numbers Emerging Economies as a Percentage of the Total World Population Landmass Energy Consumption GDP at PPP Exports GDP at Market Rates Market cap (full market) Market cap (float adjusted) 0
10
20
Emerging Markets
30
40
50
Developed Markets
As of 31 December 2010 Source: BP, CIA World Factbook, IMF World Economic Outlook, MSCI The information in the chart above is for illustrative purposes only and does not represent any product offered by Lazard.
60
70
80
90
100
The Case For Investing In Emerging Markets Strong Fiscal Indicators in EM
Lower Debt / GDP Ratios in EM
(Fiscal Deficit as % GDP)
(Debt as % GDP)
4
100
2
90
0
80 70
-2
60
-4
50 -6 40
-8
30
-10
20
-12
10
-14 2000
2002
2004
2006
Emerging Markets
2008
2010 2012F
United Kingdom
Includes 20 EM countries Source: Moody’s and Lazard, as of November 2011 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change.
0 2000
2002
United States
2004
2006
2008 2010F 2012F
Eurozone
Trade Between Emerging Markets Increasing Emerging Markets reliance on the US and Europe is expected to fall Emerging Markets Countries – Share of Total Exports 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1990
1992 US
As of 31 December 2010 Source: IMF, UBS
1994 EU
1996
1998 Intra EM
2000 Others
2002
2004
2006
2008
2010
Emerging Markets Consumers Continue to Spend Domestic Consumption Growth (% YoY) 10
8 6 4 2 0 -2 -4 2001
2002
2003
Emerging Markets
2004
Developed Markets
As of 30 June 2011 Estimated data is not a promise or guarantee of future results and is subject to change. Source: Haver Analystics, Lazard estimates
2005
2006
2007
2008
2009
2010
2011
Different Investment Environments Call for Different Approaches 3.0 2 Jul 1997 Thai baht devalues
16 Jan 1999 Brazil real devalues
Profit taking in China’s market
2.0
Greenspan’s comments on China/inflation Russian crisis
1.0
Liquidity-led recovery
Malaysian capital controls implemented
Federal Reserve comments on inflation
Argentine peso devalues
Global Credit Crisis Turkish lira devalues
Indonesian rupiah goes to 15,000/$
0.0 1997
1998
1999
2000
2001
MSCI Emerging Markets Index As of 31 December 2011 Source: Lazard, MSCI
2nd Gulf War Brazilian Election Turmoil
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
The Case for Emerging Markets Diversification MSCI Emerging Markets Index 0%
25
-10%
20 -20% 15
-30%
-40%
10
-50% 5 -60% -70% 1988
0 1990
1992
Returns (RHS)
1994
1996
1998
2000
Drawdown from Peak (LHS)
Source: Lazard, MSCI As of 21 December 2011 The information in the chart above is for illustrative purposes only and does not represent any product offered by Lazard.
2002
2004
2006
2008
2010
Drawdown Comparison A balanced approach can reduce entry point risk by curtailing drawdowns 0%
-10%
-20%
-30%
-40%
-50% Return1
-60%
Volatility1
Emerging Markets Equity2
7.0%
25.0%
Emerging Markets Equity and Debt3
9.3%
14.4%
-70% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1 Annualized over the period from 2/8/1995 to 12/21/2011.
As of 21 December 2011
2 MSCI Emerging Markets Index
Source: Lazard, J.P. Morgan, MSCI
3 50% MSCI Emerging Markets Index, 25% J.P. Morgan ELMI+ Index, 25% J.P. Morgan EMBI Global Diversified Index, rebalanced quarterly
The information in the charts above is for illustrative purposes only and does not represent any product offered by Lazard.
Evolution of the Emerging Markets Opportunity Set MSCI Emerging Markets IMI Index 2,785
2,779
2010
Nov 2011
2,576 2,419 2,205
2,187
2006
2007
2,015 1,787 1,582 1,315
2002
2003
2004
2005
2008
2009
Number of Constituents As of 30 November 2011. MSCI methodology changed from full-market cap weighting to free-float market cap weighting in 2002. This made the index constituents drop significantly in 31 May 2002. Source: MSCI
MSCI EM as a Proportion of MSCI ACWI But the long-term trend is up 16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00 2002
2003
2004
Source: MSCI Past performance is not a reliable indicator of future results
2005
2006
2007
2008
2009
2010
2011
MSCI Emerging Markets Index Expansion 1988: 10 Countries Thailand 9.06% Portugal 8.52%
2012: 21 Countries Thailand 1.91%
Argentina 1.81% Brazil 18.91%
Philippines 3.12%
Brazil 15.39%
Taiwan 10.83%
Chile 1.77%
South Korea 14.60%
China 17.86%
Chile 8.93%
Mexico 7.65%
Greece 5.29% Jordan 2.93% Malaysia 33.78%
Colombia 0.99% South Africa 7.68%
Russia 6.58% Poland 1.28% Philippines Peru 0.74% 0.67% Morocco 0.15%
As of 30 November 2011 Source: MSCI
Turkey 1.21%
India 6.43% Mexico 4.63%
Indonesia 2.96% Malaysia 3.46%
Czech Republic 0.33% Egypt 0.29% Hungary 0.27%
Emerging Market Debt Issuance Expands Hard Currency Gross Issuance (US $B) EM Sovereign 200
EM Corporates and Quasi-sovereign
160
120
80
40
0 2000
2001
2002
EM Sovereign As of 31 January 2012 Source: JP Morgan, Bank of America Merrill Lynch, ING
2003
2004
2005
2006
2007
EM Corporates and Quasi-sovereign
2008
2009
2010
2011
2012e
Conclusions • Fundamentals in emerging markets remain strong / intact • Expanding opportunity set allows for potential risk reduction
• The complexity and scale of ever expanding universe requires considerable resources / consideration
The60% History of Emerging Market Over of universe is now Investment GradeSovereign
Spreads
1600 Asian Financial Crisis BBB-
Russian Default
1400
LTCM Blowup
1200
BB+ Argentina Default
1000
Mexico upgraded to Investment Grade
Brazil Election Turmoil
BB
Global Financial Crisis US Downgraded
800 Russia upgraded to Investment Grade
Greek Debt Crisis
Local Debt Issuance Surpasses External Debt Issuance Brazil Upgraded to Investment Grade
600
BB-
400
B+ 200
Sovereign Spread represented by stripped spread (in bps) of J.P.Morgan EMBI Global Diversified Index [LHS] Average credit rating of the J.P.Morgan EMBI Global Diversified Index [RHS] B
Improved credit quality has led to lower spreads and lower volatility Source: J.P. Morgan As of 31 August 2011
Aug-11
Mar-11
Oct-10
May-10
Dec-09
Aug-09
Mar-09
Oct-08
May-08
Dec-07
Aug-07
Mar-07
Oct-06
May-06
Dec-05
Aug-05
Mar-05
Oct-04
May-04
Jan-04
Aug-03
Mar-03
Oct-02
May-02
Jan-02
Aug-01
Mar-01
Oct-00
May-00
Dec-99
Aug-99
Mar-99
Oct-98
May-98
Dec-97
0
MSCI Global Investable Market Indices Criteria A
Frontier
Emerging
Developed
Economic Development No requirement
No requirement
Country GNI per capita 25% above the World Bank high income threshold* for 3 consecutive years
2
3
5
Company size (full market cap)**
USD 434 mm
USD 867 mm
USD 1734 mm
Security size (float market cap)**
USD 34 mm
USD 434 mm
USD 867 mm
Security liquidity
2.5% ATVR
15% AVTR
20% ATVR
C1 Openness to foreign ownership
At least some
Significant
Very High
C2 Ease of capital inflows/outflows
At least partial
Significant
Very High
C3 Efficiency of the operational framework
Modest
Good & tested
Very High
C4 Sustainability of institutional framework
Modest
Modest
Very High
A1 Sustainability of economic development
B
Size and liquidity requirements
B1 Number of companies meeting the following standard index criteria
C
Market accessibility criteria
* High income threshold for 2007: GNI per capita of USD 11,456 (World Bank, Atlas method) ** Minimum in use for the May 2008 Semi-Annual Index Reviews, updated on a semi-annual basis
MSCI Emerging Market Classification MSCI emerging market classification approach aims to strike a balance between the economic development and the market accessibility of a country. It requires good efficiency of the operational framework and modest stability of the institutional framework, with significant accessibility for foreign ownership. MSCI covers all investable large and mid cap securities across the Emerging Markets and target approximately 85% of each market's free-float adjusted market capitalisation.
The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.