Is now the right time to take the long view on emerging markets equities?

Transcription

1 Is now the right time to take the long view on emerging markets equities? The Investment Expert, Stockholm October 214 Alex Homan, CFA Investment Director Global Emerging Market Equities

2 Backdrop for global investing Increase in government debt Subsequent collapse in rates and yields Source: Haver Analytics, December 213. Bloomberg, 31 st May 214. Japan interest rates as at 3 th April Euro Area Australia Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Japan Netherlands Norway Portugal Spain Sweden UK US Government debt / GDP 1 Jan-7 Jun-7 Nov-7 Apr-8 Sep-8 Feb-9 Jul-9 Dec-9 May-1 Oct-1 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 US Europe UK Japan

3 The implication of lower rates for different types of stocks Falling rates increase the attraction of other yielding assets 25 2 RETURN ON CAPITAL SUSTAINABLE RETURN Businesses that can sustain their returns on capital Return driver (%) 15 The importance of competitive advantage STRONGER REAL RETURNS ERODED RETURN New competition takes advantage of cheaper funding Returns should erode as competition increases Sustainable returns become increasingly valuable 1 VALUATION - EARNINGS YIELD 1% EY => 1x PE Falling earnings yield should lead to multiple expansion 5 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 The impact of a lower earnings yield MULTIPLE EXPANSION 5% EY => 2x PE As rates fall, so should the earnings yield Falling yields equate to multiple expansion Lower discount rates also increase the PV of future earnings Structural growth stories become even more attractive US interest rate Earning Yield ROE Source: Fidelity, Bloomberg, 3 th May

4 What s been setting the tone in 214? EM has been underperforming since Elections driving sentiment in 214 Election & Date Likely Win Who Won Mkt Friendly Indonesia Parliamentary (Apr-14) Opposition Hungary Parliamentary (Apr-14) Incumbent S. Africa Parliamentary (Apr-14) Incumbent MSCI EM Index relative to MSCI World Index (total return, rebased) Current valuations reflect weak expectations 3% 2% Colombia Presidential (May-14) Incumbent India Parliamentary (May-14) Opposition 1% % Indonesia Presidential (Jul-14) Opposition -1% Turkey Presidential (Aug-14) Incumbent -2% -3% Brazil Presidential (Oct-14) Too close to call? -4% Price/Book Value relative to MSCI World Source: Index Returns Datastream, rebased to 1, USD, 3 July 24 to 3 July 214. Valuations Fidelity Worldwide Investment, Datastream. Data for the last ten years to 31 July 214. Green line represents current level. Elections - Fidelity Worldwide Investment, July

5 The impact of politics on sentiment Surgutneftegas Ordinary Share Petrobras Ordinary Share Historic PE multiple Historic PE multiple Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 6 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Source: Bloomberg. Data as at 31 July

6 Sustainability of returns and balance sheet 214 scorecard (USD) Surgutneftegas Preference Share Petrobras Ordinary share Return on Assets 1.2% 3.% EBITDA Capex (4.2) (41.5) Free cashflow 3.5 (14.8) Dividend payment (.9) (2.7) Dividend yield 7.6% 3.4% Net cash/(debt) 14.6 (93.7) Net debt/ebitda -1.8x 4.2x Enterprise Value P/E multiple 4.8x 8.9x EV/EBITDA -1.1x 6.x Source: Bloomberg. As at 15 August 214. Numbers may not add due to rounding. 5

7 Supply side dominates iron ore pricing Supply growth drives surplus from 213 onwards More than 3m tonnes coming on at the left hand end of the cost curve = inflection point USD / tonne, 62% Fe equivalent m tonnes extra supply , 1,499 1,5 2, Global production Global consumption Cumulative Production (m tonnes) Surplus / (Deficit) (RHS) Source: Wood Mackenzie, Morgan Stanley, Fidelity Worldwide Investment. June

8 Sustainable earnings determine intrinsic value of an enterprise FY 215 scorecard (USD) Vale Ordinary Share Using $12 iron ore Vale Ordinary Share Using $8 iron ore Tonnes of iron ore mined (bn tonnes) Revenue per tonne ($/tonne) 12 8 Total revenues (bn USD) EBITDA (bn USD) Capex (bn USD) (12.7) (12.) Dividend payment (bn USD) (4.) (4.) Net cash/(debt) (bn USD) (25.8) (29.8) Net debt/ebitda multiple 1.x 2.3x P/E multiple 5.1x 15.6x EV / EBITDA multiple 4.1x 8.3x Source: Selected financials sourced from Bloomberg, Fidelity Worldwide Investment estimates and company presentations. As at 17 August

9 Weakening Chinese property demand adds further pressure Weakening sales reduce need for new building activity and therefore raw materials 12% 1% 8% 6% 4% 2% % -2% -4% 8 Residential housing market activity, YoY, 3mma May-29 Sep-29 Jan-21 May-21 Sep-21 Jan-211 May-211 Sep-211 Jan-212 May-212 Sep-212 Jan-213 May-213 Sep-213 Jan-214 May-214 Sold Starts ( lagged 5mths) Source: Fidelity, Haver Analytics, May 214.

10 Sustainable earnings for Chinese banks require adjustments for structural impairments FY 214 scorecard (USD) Headline numbers for ICBC Price to book value.83 Rationale Restated numbers for ICBC after potential impact of NPLs Price Book Value 1 Potential 25% write-down of book.75 Restated P/B 1.11 Return on Assets (RoA) 1.4% Impairment charge (.3%) This could rise at least 5bps (.8%) Restated RoA.9% Leveraged 14x May well normalise to lower level 1x RoE 2% 9% Source: Selected financials sourced from Bloomberg, Fidelity Worldwide Investment estimates. As at 24 th June

11 South Africa - the big picture is not the whole picture Disappointing SA macro data is not a new phenomenon 8 But what really determines a company s ability to compound returns? South Africa Real GDP Annual (yoy %) Shoprite Share price (ZAR) Shoprite - Earnings Per Share (12 mth trailing) - RHS Source: South Africa GDP Bloomberg, to 31 March 214. Shoprite share price and earnings Datastream, 31 July

12 Africa The demographic dividend Positive population dynamics and increasing wealth drive domestic consumption 2 25 Population (million) GDP/capita (USD, current prices) Population (million) GDP Per capita (Current prices in USD, RHS) The region s largest economy Nigeria exemplifies the long-term Africa opportunity Source: IMF: World Economic Outlook, July 213, UN: World Population Prospects, June

13 Smartphones provide internet access to the Emerging World Rapid increase in EM subscriber growth 5% Developing market countries 214 Forecast Smartphone subscriber growth 4% 3% 2% 1% Developed market countries % % 2% 4% 6% 8% 1% 12% Penetration (Smartphone subs / Total population) Source: IDC, May 214. Bubble size reflects 213 subscriber numbers. 12

14 Rise of the low end smartphone impacts average selling price (ASP) Increase in low-end smartphone uptake......results in rapid erosion of smartphone ASP 35 $45 Smartphone vloumes by price band % Average smartphone selling price globally $4 $35 $43 $422 $428 $425 $387 $335 Q17 Q18 Q19 Q11 Q111 Q112 Q113 Q114 $-2 $2-5 $55+ $ Source: IDC, May

15 Weaker ASPs will impact the smartphone supply chain Pressure on Samsung s earnings will put pressure on their component part manufacturers too 7 Smartphone share of Samsung earnings (%) Source: CLSA, June

16 ...but also help to boost internet penetration Acceleration in mobile internet penetration has driven a rapid uptake of popular apps % mobile share of total internet users 4 69% 74% % 66% Chinese Internet Users Chinese Mobile Internet Users Wechat App Users Online Shoppers Source: China Internet Network Information Centre (CNNIC), Boston Consulting Group, April

17 Why Emerging Market Equities? Emerging market equities are an important growth component for any investment portfolio Powerful demographics support long-term structural growth opportunities Valuations at historically low levels provide downside support However, an active approach is critical to avoiding weaker components of traditional indices 16

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19 Important information 18