Emerging Markets: Riding with the EM Consumer

Transcription

1 Emerging Markets: Riding with the EM Consumer January 25, 2016 George Iwanicki Emerging Markets Macro Strategist

2 The Road to Development Frontier Markets Emerging Markets Developed Markets 1

3 Avenues supporting the long-term outlook for EM Consumption Shown for illustrative purposes only. 2

4 The Virtuous Circle of Emerging Markets development The Enablers Better economic policies Globalization Shown for illustrative purposes only. 3

5 The demographic inevitability of emerging markets growth leadership Developed Market 2015 demographic profile , ,000 50, , ,000 Male LF Male POPULATION Female LF Female POPULATION Emerging Market 2015 demographic profile , , , ,000 Male LF Male POPULATION Female LF Female POPULATION Sources: UN, J.P. Morgan calculations; as of 3/15/15. Shown for illustrative purposes only. 4

6 % Urban Million people Inexorable urbanization Merely the midpoint of a multi-decade urbanization across Emerging Markets % of EM population in urban areas (LHS) Total change in urban population from prior 5 year period (RHS) Sao Paulo Chongqing Nairobi Cape Town Source: World Bank Data. Data as at June 30, For illustrative purposes only. 5

7 Demographics and Urbanization giving rise to the EM middle class Global middle-class wave shifting consumption East Global middle-class consumption will shift heavily toward China, India and other Asian countries (excluding Japan) as the high-income countries see their share decrease Source: H. Kharas (2010), The Emerging Middle Class in Developing Countries, OECD Development Center Working Paper No Shown for illustrative purposes only. 6

8 Some near-term roadblocks for EM Consumption Shown for illustrative purposes only. 7

9 Private Credit/GDP (%) EM credit penetration varies but has been ubiquitous of late Credit has generally outstripped GDP growth over the past several years likely to pause as Fed normalizes Economic Development and Private Credit Intensity, 2014 EM aggregate credit to GDP ratio % Quarter before Fed tightening 160 CN KO 130% 140 TW 120% 120 TH MY 110% % 80 ZA BR 90% IN GCC TU ID MX EG AR GDP per Capita (USD) 80% 70% 60% 50% 40% Source: IIF, NBS, People Bank of China, J.P. Morgan Asset Management calculations. LHS as of RHS as of November 30, Shown for illustrative purposes only.

10 Emerging Markets growth premium currently modest A reflection of the triumvirate of headwinds : USD strength, commodity weakness, slowing domestic credit Forecast GDP growth - Next 12 months 7 % EM GDP NTM DM GDP NTM Spread EM - DM (1) (2) (3) 10/93 10/94 10/95 10/96 10/97 10/98 10/99 10/00 10/01 10/02 10/03 10/04 10/05 10/06 10/07 10/08 10/09 10/10 10/11 10/12 10/13 10/14 10/15 Source: J.P. Morgan Asset Management, Consensus Economics; as of December 31, NTM = next 12 months. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. EM = Emerging Markets; DM = Developed Markets. Past performance is not indicative of future results.

11 The outlook further down the highway for EM Consumption Shown for illustrative purposes only. 10

12 Autos a good proxy for the future of EM consumption Economic development naturally shifts auto penetration (and sales) into a higher gear 900 Autos per 1,000 people vs. GDP per capita (constant 2005 USD) USA Japan Germany Luxembourg Korea 300 Mexico Indonesia China 0 1,000 10, ,000 Source: World Bank, J.P. Morgan Asset Management. Data as at December 31, 2011.

13 Summary The classic drivers of economic development namely urbanization, industrialization, and infrastructure building, augmented by youthful demographics continue to characterize the EM (and developing) world from a secular perspective; Projections from the OECD and World Bank imply that a rising middle class in the EM and developing world will account for the majority of global consumption spending by 2030; As positive and seemingly inevitable that these trends are, it is worth remembering that few things in economics proceed in a straight line; In that vein, it is worth noting that current EM growth is struggling under a triumvirate of headwinds, including a rising US dollar, an extended reversal in commodity prices, and sluggish domestic demand that is unlikely to experience a re-acceleration of credit growth given the onset of Federal Reserve policy normalization; Nonetheless, the evolution of the auto sector provides a good illustration of what lies ahead for the EM consumer longer-term: penetration rates that rise with GDP per capita and accordingly shift the weight of global consumption toward EM and developing countries Source: JPMorgan, as at December Opinions, estimates and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice.

14 0903c02a J.P. Morgan Asset Management Disclosure Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable. These views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Past performance is no guarantee of future results. Emerging Markets Risks: The strategy is subject to management risk and may not achieve its objective if the adviser s expectations regarding particular securities or markets are not met. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Also, some overseas markets may not be as politically and economically stable as the United States and other nations. The strategy s investments in emerging markets could lead to more volatility in the value of the Fund's shares. As mentioned above, the normal risks of investing in foreign countries are heightened when investing in emerging markets. In addition, the small size of securities markets and the low trading volume may lead to a lack of liquidity, which leads to increased volatility. Also, emerging markets may not provide adequate legal protection for private or foreign investment or private property. The manager may use derivatives in connection with its investment strategies. Derivatives may be riskier than other types of investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the strategy s original investments. Certain derivatives may give rise to a form of leverage. As a result, the strategy may be more volatile than if the strategy had not been leveraged because the leverage tends to exaggerate the effect of any increase or decrease in the value of the portfolio s securities. Derivatives are also subject to the risk that changes in the value of a derivative may not correlate perfectly with the underlying asset, rate or index. The use of derivatives for hedging or risk management purposes or to increase income or gain may not be successful, resulting in losses to a portfolio, and the cost of such strategies may reduce a portfolio s returns. Derivatives would also expose a portfolio to the credit risk of the derivative counterparty. Commodity Risks: The value of commodity related securities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. The energy sector can be significantly affected by changes in the prices and supplies of oil and other energy fuels, energy conservation, the success of exploration projects, and tax and other government regulations, policies of the Organization of Petroleum Exporting Countries ( OPEC ) and relationships among OPEC members and between OPEC and oil importing nations. The metals sector can be affected by sharp price volatility over short periods caused by global economic, financial and political factors, resource availability, government regulation, economic cycles, changes in inflation or expectations about inflation in various countries, interest rates, currency fluctuations, metal sales by governments, central banks or international agencies, investment speculation and fluctuations in industrial and commercial supply and demand. Use of leveraged commodity-linked derivatives creates an opportunity for increased return but, at the same time, creates the possibility for greater loss. There can be no assurance that the professionals currently employed by JPMAM will continue to be employed by JPMAM or that the past performance or success of any such professional serves as an indicator of such professional s future performance or success. Any securities/portfolio holdings mentioned throughout the presentation are shown for illustrative purposes only and should not be interpreted as recommendations to buy or sell. A full list of firm recommendations for the past year are available upon request. Past performance does not guarantee future results. Total returns assumes reinvestment of any income. The deduction of an advisory fee reduces an investor s return. Actual account performance will vary on individual portfolio security selection and the applicable fee schedule. Fees are available upon request. The following is an example of the effect of compounded advisory fees over a period of time on the value of a client s portfolio: A portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum would grow to $259 million after 10 years, assuming no fees have been paid out. Conversely, a portfolio with a beginning value of $100 million, gaining an annual return of 10% per annum, but paying a fee of 1% per annum, would only grow to $235 million after 10 years. The annualized returns over the 10 year time period are 10.00% (gross of fees) and 8.91% (net of fees). If the fee in the above example was 0.25% per annum, the portfolio would grow to $253 million after 10 years and return 9.73% net of fees. The fees were calculated on a monthly basis, which shows the maximum effect of compounding. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices.

15 0903c02a J.P. Morgan Asset Management Disclosure JPMorgan Distribution Services, Inc., member FINRA / SIPC Securities may be sold through J.P. Morgan Institutional Investments Inc., member FINRA/SIPC. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, JPMorgan Chase Bank N.A., J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated, J.P. Morgan Alternative Asset Management, Inc., and J.P. Morgan Asset Management (Canada), Inc. Copyright 2016 JPMorgan Chase & Co. All rights reserved.