The case for emerging markets

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Gertrude Gilbert
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1 The case for emerging markets For institutional use only. Not intended for reproduction or use with the public. ny views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. The material and/or its contents are current as of the most recent quarter end, unless otherwise noted. Certain data provided is that of a third party. While data is believed to be reliable, no assurance is being provided as to its accuracy or completeness. May 217 Tushar Poddar, PhD Macroanalyst Wellington Management International Ltd Wellington Management Company LLP /45365_8/45365/45365

Structural outlook for EM has improved Demographics still favorable labor force is growing; rapid urbanization Technology catch-up accelerating Government effectiveness improving; doing business

2 Structural outlook for EM has improved Demographics still favorable labor force is growing; rapid urbanization Technology catch-up accelerating Government effectiveness improving; doing business getting easier Greater investments in human capital Macro imbalances have reduced current account and fiscal deficits have come down Monetary discipline has improved, real rates are high Currency regimes have gone from fixed to floating, reducing vulnerabilities /45365_7/45365/45365 Copyright 217 ll Rights Reserved

3 Favorable Demographics Title Working Line age 2 populations are growing in most of EM Rapid urbanization continues to boost labor productivity Philippines Malaysia Indonesia India Mexico Turkey Brazil South frica Chile US UK Thailand South Korea China Dev Europe Hungary Japan Russia Poland 5-year % change in working age population, ages (215 22F) Urban population (bil) Emerging markets Developed markets Sources: Goldman Sachs Research, Worldbank, UN forecasts generated in /45365_8/45365/45365 Copyright 217 ll Rights Reserved

4 Technology rapid catch-up 6, Number of mobile phone users (mil) 2,5 Number of internet users (mil) 5, 2, 4, 1,5 3, 1, 2, 1, Emerging markets Developed markets Sources: Goldman Sachs Research, Worldbank /45365_8/45365/45365 Copyright 217 ll Rights Reserved

Doing business getting easier EM governments are cutting red tape to boost productivity Title Line 2 15 Number of days required for 23 12 216-26 9-43 6-34 3

5 Doing business getting easier EM governments are cutting red tape to boost productivity Title Line 2 15 Number of days required for Getting electricity Registering property Starting a business Sources: Goldman Sachs Research, Worldbank /45365_8/45365/45365 Copyright 217 ll Rights Reserved

Investing in Human Capital Title College Line going 2 population is hitting critical mass in large parts of EM 3 EM college enrollment rate (%) 25 2 15 1 5

6 Investing in Human Capital Title College Line going 2 population is hitting critical mass in large parts of EM 3 EM college enrollment rate (%) Sources: Goldman Sachs Research, Worldbank /45365_9/45365/45365 Copyright 217 ll Rights Reserved

7 Current account deficits have shrunk since taper tantrum Current account balance as a percentage of GDP (S, %) Brazil Turkey South frica India Indonesia /9 12/1 12/11 12/12 12/13 12/14 12/15 12/16 Sources: Haver, EMERGE, National accounts The grey column represents the effect of the taper tantrum, during the summer /45365_1/45365/45365 Copyright 217 ll Rights Reserved

8 High real rates suggest monetary policy discipline Real rates high across EM, not just in a few countries 8 EM vs the world 3 EM individual countries EM EUR US /1 3/5 3/9 3/13 3/17-2 3/7 3/9 3/11 3/13 3/15 3/17 BR ID MX RS KO CH IN MY S Source: Haver Real rates are calculated as 3m T-bill minus actual inflation EM represents the average of EM countries each month /45365_8/45365/45365 Copyright 217 ll Rights Reserved

9 EM banking crises have become less frequent Year rgentina Egypt Morocco 1981 Chile Mexico Uruguay 1982 Colombia Ecuador Kuwait Turkey 1983 Peru Philippines Thailand Kenya 1986 Bolivia 1987 Bangladesh Costa Rica 1988 Cote d'ivoire Panama 1989 rgentina El Salvador Sri Lanka 199 lgeria Brazil Lebanon Romania 1991 Georgia Hungary Nigeria Tunisia 1992 Bosnia Estonia Kenya Poland Slovenia 1993 India Macedonia 1994 lbania rmenia Bolivia Brazil Costa Rica Mexico Venezuela 1995 rgentina zerbaijan Belarus Latvia Lithuania Paraguay 1996 Bulgaria Czech Jamaica Ecuador 1997 Indonesia Korea Malaysia Philippines Thailand Vietnam 1998 China Colombia Croatia Ecuador Russia Slovakia Ukraine 1999 Year Turkey 21 rgentina 22 Uruguay 23 Dominican R Hungary Iceland Kazakhstan Latvia Russia Slovenia Ukraine Russia Ukraine /45365_8/45365/45365 Copyright 217 ll Rights Reserved

10 Cyclical dynamics are favorable EM growth picking up after 5 years of slowdown No major EM economy expected to be in recession in 217 djustment to commodity price shock largely done Inflation remains contained, suggesting still room to grow Central banks are still not in hiking mode, given high real rates Earnings beginning to improve /45365_4/45365/45365 Copyright 217 ll Rights Reserved

ctivity is picking up as shown by IP and PMI 65 6 PMI: Composite, services and manufacturing EM PMI services EM PMI Manufacturing PMI Composite 1 8 IP ex construction (%, Y/Y) EM DM 6 55

11 ctivity is picking up as shown by IP and PMI 65 6 PMI: Composite, services and manufacturing EM PMI services EM PMI Manufacturing PMI Composite 1 8 IP ex construction (%, Y/Y) EM DM /11 9/11 5/12 1/13 9/13 5/14 1/15 9/15 5/16 1/17 Sources: Markit, Haver, IMF /45365_6/45365/45365 Copyright 217 ll Rights Reserved

12 Growth picking up, but not inflation fter several years of slowdown, EM GDP growth is showing an uptick Gap between EM and DM inflation has narrowed Central bank credibility has improved; inflation targeting has helped 12 GDP, Y/Y % Consumer prices, Y/Y % /1 12/4 12/7 12/1 12/13 12/16-6 6/1 9/3 12/5 3/8 6/1 9/12 12/14 3/17 Sources: IMF, Citigroup, Reuters Datastream Emerging markets Developed markets /45365_8/45365/45365 Copyright 217 ll Rights Reserved

13 ttractive valuations EM market valuations are compelling on a relative and absolute basis 5 Comparison of CPE valuations Cyclically adjusted P/E (x) EM World /5 1/7 4/8 7/9 1/1 1/12 4/13 7/14 1/15 1/17 Sources: MSCI, CLS CPE is the ratio of current price and 1 year historic average EPS, not inflation adjusted /45365_3/45365/45365 Copyright 217 ll Rights Reserved

14 Price-to-book measures are still attractive 4 EM vs the world 4 EM regions EM World US 6/1 9/3 12/5 3/8 6/1 9/12 12/14 3/17 sia ex Japan CEEC Latm 6/1 9/3 12/5 3/8 6/1 9/12 12/14 3/17 Sources: MSCI, Datastream Notes: Price-to-Book, MSCI definition CEEC: Country Europe Investable Market + Frontier Markets (FM) CEEC /45365_1/45365/45365 Copyright 217 ll Rights Reserved

Earnings are beginning to show an uptick 12 EM vs the world EM 12 World EM regions sia ex Japan US 9 9 6 6 3 3-3 -3 CEEC Latm -6-6 9/4 3/7 9/9 3/12 9/14 3/17 9/4 3/7 9/9 3/12 9/14 3/17 Sources: MSCI,

15 Earnings are beginning to show an uptick 12 EM vs the world EM 12 World EM regions sia ex Japan US CEEC Latm /4 3/7 9/9 3/12 9/14 3/17 9/4 3/7 9/9 3/12 9/14 3/17 Sources: MSCI, Datastream Notes: Year on year growth trailing earnings per share, MSCI definition CEEC: Country Europe Investable Market + Frontier Markets (FM) CEEC /45365_7/45365/45365 Copyright 217 ll Rights Reserved

16 Challenges for EM Still high debt burden Sharp slowdown in China New sources of growth for commodity exporters Trade protectionism Geopolitics /45365_8/45365/45365 Copyright 217 ll Rights Reserved

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