GEM_STRATEGY：2002-ERA_VALUATIONS_DO_NOT_HERALD_A_BULL_MARKET_FOR_GEM_EQUITIES-2013-02-28.pdf

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1、Deutsche Bank Markets Research Global Strategy GEM Strategy Date 27 February 2013 Strategy Update 2002-era valuations do not herald a bull market for GEM equities _ Deutsche Bank AG/London Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors sho

2、uld be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012. John-

3、Paul Smith Strategist (+44) 20 754-76992 john- Priyal Mulji Strategist (+44) 20 754-72094 Table Of Contents 2013 compared with 2002: Superficially more attractive valuations and fund flows, but structural fundamentals more bearish Page 2 EM country and sector valuation snapshots Page 8 China: Econo

4、my and market have become addicted to increasing mobilisation of credit - Remain underweight Page 9 Russia: Top-down outlook appears to be positive but equity investors face more complex reality - Remain underweight Page 12 India: Some positive reform momentum but very low political, economic and co

5、rporate visibility - Neutral/ Overweight in default of better alternatives, but still prefer cash Page 16 Brazil: Utterly unloved on the back of state intervention and deteriorating economy, but poor sentiment is not a sufficient reason to upgrade - Underweight Page 19 South Africa: Vulnerable to Ch

6、ina slowdown and reduced foreign portfolio flows, but strength of institutions and corporate governance should provide some downside protection - Neutral Page 22 Cheap valuations cancelled out by deteriorating fundamentals across BRICS We compare the situation facing EM investors today with 2002, wh

7、en GEM was on the verge of a massive bull market in both absolute and relative terms. While valuations appear similar at an aggregate level, the underlying fundamentals are very different. In 2002, following a series of economic and financial crises, there was a positive shift towards capital-friend

8、ly economic policies and corporate governance taking place across most of the EM universe, which had gone almost completely unrecognised by investors. By contrast today, the situation has reversed with no visible improvement in corporate governance in privately controlled companies and a pronounced

9、tendency across the BRICS in particular, for increasing levels of state intervention to the detriment of minority investors, with the partial exception of India. The result is a polarisation of valuations within GEM, which is a very bearish indicator, as, unlike 2002, practically all of the cheap se

10、ctors and stocks have fundamentals which are visibly deteriorating. Next big driver likely to be a major downshift in expectation of Chinese growth The success of the Chinese authorities in sustaining high rates of GDP growth has been at the heart of the bull case for GEM equities as i) China is by

11、far the biggest market within GEM, ii) China has been a major driver of commodity markets and hence of the Russian, South African and Brazilian economies/markets, iii) Chinas rapid growth, based on their state-led development strategy, has been the major intellectual underpinning of long GEM/short D

12、M. We believe that 2013 will mark the year when economists and investors focus on the underlying imbalances within the Chinese economy, and accordingly reduce their expectations of sustainable growth over the medium term. The deterioration in the perception of China is likely to have a very disrupti

13、ve effect on GEM equities through both fundamental factors and fund flows, and there are few obvious hiding places within the asset class. US based asset classes are still the obvious beneficiaries of EM problems The prospect of lower growth rates in China will initially be to exacerbate the disinfl

14、ationary pressures in the global economy through cheaper exports and lower commodity prices. The immediate impact in likely to be one final move down in US Treasury yields and a rise in the global equity risk premium. The dollar is likely to experience a sustained rally through most of 2013, sucking

15、 liquidity out of EM assets, especially local currency debt, though EM dollar debt is also vulnerable given the massive fund inflows since 2009. Even if the fall in commodity prices is not on the same scale as 2008, the prospects for recovery are also much lower, which should deliver the final coup

16、de grace to commodities as an asset class. Lower commodity prices should enhance the appeal of US equities, which we believe are around twenty-seven months into a multi-year bull market against GEM equities, reflecting the superior performance of the US economy and corporate sector coming out of the

17、 financial crisis. We tentatively forecast that US equities should end the year with gains of up to 10% compared with a fall of 10-15% for MSCI EMF. Within GEM, we retain our existing country recommendations which are based on our structural scenario, but at this point, would only emphasise our unde

18、rweight China and overweight cash calls. 27 February 2013 GEM Strategy Page 2 Deutsche Bank AG/London 2013 compared with 2002: Superficially more attractive valuations and fund flows, but structural fundamentals more bearish GEM 2002 on the cusp of a bull market We thought that we would look back to

19、 2002 in order to remind ourselves and our clients how emerging markets appeared on the cusp of their phenomenal bull run back from 2003 to 2007 when the MSCI rose by around 450% (see Figure 1). This is not just done with the benefit of hindsight at the start of 2002, the author of this piece was fo

20、rtunate enough to be running money in charge of a value-based GEM equity product when the opportunities were very obvious and were fully reflected in the subsequent absolute and relative performance. The most challenging aspect of the job was not managing the money or the very talented team, but per

21、suading potential clients of the almost historic opportunity to make outsize returns, given the propensity of the US pension fund industry in particular to allocate assets on the basis of historic performance. Today, valuations are very similar to their 2002 levels (see Figure 2), but investor senti

22、ment has been much more bullish towards EMs, in both absolute terms and relative to their developed counterparts, which has been reflected in both retail and institutional allocations. We have compared the background to the two periods and believe that in 2013, GEM equities are about twenty-seven mo

23、nths into a period of multi-year underperformance against US equities and are most likely on the verge of a further decline in absolute terms. Figure 1: MSCI EM versus MSCI World and MSCI US (31 January 2002 = 100) 70 120 170 220 270 320 370 420 470 EMWorldUS Source: Deutsche Bank, Bloomberg Finance

24、 LP 27 February 2013 GEM Strategy Deutsche Bank AG/London Page 3 Figure 2: EM countries and sectors - Current versus 2002 valuations Country Country P/BV in January P/BV in January 2002 (x) 2002 (x) Current Current P/BV (x) P/BV (x) Sector Sector P/BV in January P/BV in January 2002 (x) 2002 (x) Cur

25、rent Current P/BV (x) P/BV (x) EM EM 1.67 1.67 Energy Energy 1.58 1.04 Brazil Brazil 1.08 1.47 Materials Materials 1.4 1.54 Chile Chile 1.36 2.39 Industrials Industrials 0.97 1.55 Mexico Mexico 2.16 3.28 Consumer Consumer DiscretionaryDiscretionary 1.72 2.15 Russia Russia 1.4 0.85 Consumer Consumer

26、Staples Staples 2.46 4.19 Poland Poland 1.59 1.33 Health Care Health Care 3.41 3.77 Turkey Turkey 3.67 1.90 Financials Financials 1.62 1.59 Hungary Hungary 2.32 0.97 Information Information Technology Technology 2.86 2.05 China China 1.55 1.77 Telcos Telcos 2.26 2.37 India India 2.17 2.76 Utilities

27、Utilities 0.66 1.03 Korea Korea 1.43 1.15 Taiwan Taiwan 2.09 1.82 South Africa South Africa 1.84 2.59 Indonesia Indonesia 3.29 3.84 Malaysia Malaysia 1.82 2.10 Thailand Thailand 1.99 2.63 Source: Deutsche Bank, Bloomberg Finance LP as at 21 February 2013 Comparison between 2002 and 2013 backward loo

28、king indicators appeared much more negative in 2002 than today, but the direction of marginal change in the economic and corporate fundamentals was generally more positive than is currently the case. 1. Absolute valuation multiples appear fairly similar while GEM is not as cheap as in 2002 relative

29、to the US Absolute valuation multiples appear fairly similar while GEM is not as cheap as in 2002 relative to the US. At the start of 2002 the MSCI EMF was actually trading at the same PBR as it is today at just under 1.67X. Valuations for US equities were undergoing the rapid de-rating which took p

30、lace after the implosion of the tech bubble from a peak PBR of over 5.7X to the January 2002 level of 3.3X, which compares with 2.3X today. Relative to ROE, both the GEM and US valuations are cheaper today compared with 2002 although the de- rating relative to ROE has been greater for US equities (s

31、ee Figure 3 and Figure 4). Figure 3: MSCI EM - P/BV (x) versus ROE (%) Figure 4: MSCI US - P/BV (x) versus ROE (%) 10 11 12 13 14 15 16 17 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 19961997199819992000200120022003200420052006200720082009201020112012 RoE (%) P/BV (x) P/BV (x) - LHSRoE (%) - RHS 7 8 9 1

32、0 11 12 13 14 15 16 17 1.7 2.2 2.7 3.2 3.7 4.2 4.7 5.2 5.7 19961997199819992000200120022003200420052006200720082009201020112012 RoE (%) P/BV (x) P/BV (x) - LHSRoE (%) - RHS Source: Deutsche Bank, Bloomberg Finance LP Source: Deutsche Bank, Bloomberg Finance LP 27 February 2013 GEM Strategy Page 4 De

33、utsche Bank AG/London 2. Emerging market sovereign debt yields were at extremely high premiums to US Treasuries following the series of EM economic and financial crises, which had occurred since the devaluation of the Thai baht in 1997. Emerging market sovereign debt yields were at extremely high pr

34、emiums to US Treasuries following the series of EM economic and financial crises, which had occurred since the devaluation of the Thai baht in 1997. There has been a massive improvement in most of the key macroeconomic ratios, which are used to assess debt sustainability across almost all emerging e

35、conomies, both in absolute terms and relative to their major DM counterparts. Accordingly, emerging debt yields and spreads with Treasuries, have compressed to an extent almost no-one would have believed possible ten years ago. Needless to say the vast majority of investors have reacted to, rather t

36、han anticipated the improvement in fundamentals - emerging debt was ignored by the mainstream in 2002, whereas both retail and institutional investors have been pouring money into the asset class over the past four years. 3. The direction of change in economic policy was generally much more positive

37、 for both bond and equity investors across most key EM economies in 2002. The direction of change in economic policy was generally much more positive for both bond and equity investors across most key EM economies in 2002. The ferocity of the EM economic and financial crises, which took place betwee

38、n 1997 and 2001 was a catalyst for a series of economic reforms across all of the bigger emerging economies. These involved a combination of tighter fiscal discipline and in most, though not all cases, a move to freer floating exchange rates (Malaysia and China were significant exceptions). On a mor

39、e micro level, there was a renewed emphasis on institution building, the strengthening of private sector business, including some restructuring of key industries and the promotion of exports and inwards FDI. Investors were generally very slow to recognise the potential impact of these reforms, which

40、 together with the more favourable cyclical backdrop, were the foundations for the huge improvement in macro-economic indicators of financial health, which has taken place in most EMs over the past decade. The global financial crisis, which began in 2007, appears to have been a catalyst for a revers

41、ion back to much more state led policies in many of the bigger EMs, with very negative implications for EM financial assets in our view. 4. There was sufficient underutilised capacity across most EM economies to alleviate inflationary concerns but increasing shortages in some key old economy sectors

42、 There was sufficient underutilised capacity across most EM economies to alleviate inflationary concerns but increasing shortages in some key old economy sectors. The US corporate sector was emerging from a period of very high investment in the so-called new economy, whereas there had been a dearth

43、of investment into the commodity and related industries which are such an important component of the LATAM and CEMEA universes. Meanwhile, investment across much of non-Japan Asia was still convalescing after the 1997 financial crises. The magnitude of the subsequent earnings and economic recovery i

44、n some GEM economies such as Russia and Brazil, may have owed as much to undervalued exchange rates and underutilised capacity as it did to the economic reforms. Now the output gap in domestic and service related sectors tends to be much tighter so the authorities in many EMs are walking a tightrope

45、 between the fight against inflation and the need to promote growth via low interest rates and currencies. 5. China was on the verge of becoming the main driver for the whole asset classChina was on the verge of becoming the main driver for the whole asset class in 2002 in 2002 due partly to the res

46、tructuring of a significant part of Chinese industry which took place between 1998 and 2002, but more to catch-up growth on the back of faster urbanisation, adoption of western technology, the very low starting point in terms of GDP per capita and rapidly growing exports. We believe that most of the

47、se factors have now played themselves out, but that the structural deterioration in the rate of sustainable growth going forward has been obscured for the time being by the mobilisation of ever increasing financial resources. 27 February 2013 GEM Strategy Deutsche Bank AG/London Page 5 6. There was

48、a discernible trend towards better corporate governance in most EMs in 2002. There was a discernible trend towards better corporate governance in most EMs in 2002. The diminution in the role of the state in allocating resources is perhaps best illustrated in the case of Korea, where the chaebol were

49、 no longer protected by an implicit government guarantee. The situation since the 2007- 08 acute phase of the global financial crisis has been very different however, with a move towards the redistribution of resources away from capital to the state and labour across most of the larger emerging markets. The privatisations across all of the BRICs which have taken place since 2002 have in general not lived up to their earli