Latin America Equities March 2013 Stephen Burrows, Senior Investment Manager Emerging Markets - Pictet Asset Management
Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Leading indicators of economic growth Economic activity is recovering in China, the trend is yet to be confirmed in LATAM China leading indicator M/M growth Latin America leading indicator M/M growth 2.0 %m/m 1.2 1.0 %m/m Latin America leading indicator 1.5 0.8 average 1.0 0.6 0.5 0.4 0.2 0.0 0.0-0.5 Leading index growth -0.2 average (since 99) -1.0-0.4 Source:. CEIC, Datastream 2
Pakistan Egypt Croatia Israel Ukraine Hungary Venezuela Turkey Brazil South Africa Philippines Mexico Poland Hong Kong Russia Chile Taiwan Colombia Argentina Malaysia Bulgaria Singapore Thailand Czech Republic Peru Romania Korea India Indonesia Vietnam China Private investment share of GDP Lower trend growth in Brazil due to relatively low levels of private investment Private investment to GDP ratio 50 40 %GDP Total Investment Unweighted EMaverage Unweighted developed average 30 20 10 0 Source:. CEIC, Datastream 3
China Singapore Croatia Malaysia Czech Republic Hungary Russia Korea Thailand Venezuela Indonesia India Argentina Turkey Taiwan Israel Chile Egypt South Africa Brazil Romania Poland Peru Hong Kong Colombia Mexico Vietnam Bulgaria Philippines Ukraine Pakistan Consumption share of GDP The contribution of private consumption to GDP is significantly higher in LATAM compared to China, but the gap will narrow Private consumption to GDP ratio 90 %GDP 80 70 Private Consumption Unweighted EMaverage Unweighted developed average 60 50 40 30 20 Source:. CEIC, Datastream 4
Argentina Venezuela Mexico Peru Pakistan Philippines Indonesia Egypt Colombia Romania Russia Turkey India Brazil Poland Czech Republic Ukraine Hungary Bulgaria Chile Croatia South Africa Israel Korea Thailand Singapore Vietnam Malaysia China Taiwan Hong Kong Latin America remains at an early stage in the credit cycle Private domestic credit as a % of GDP: Private domestic credit (% GDP) 200 180 %GDP Latin America: 38% EM Markets: 64% 160 140 120 100 80 60 Private domestic credit average Developed Markets: 225% 40 20 0 Source: 5
Latin American equities have a relatively large exposure to the consumption theme Weight of consumer staples within MSCI equity indices*: EM real retail sales by region 400 100 = January 2000 Latin America: 18.5% 350 300 EM Markets: 8.8% China: 5.5% 250 200 150 100 50 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Asia Latin America EMEA Source:. CEIC, Datastream, * as at 14.02.2013 6
but the consumer sector is expensive P/Book Value: MSCI Sector as at 01/02/2013 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x Cons Disc Cons Stap Energy Financials Health Care Industrials IT Materials Max/ 5Y Avg. /Min Current P/Book Telecoms Utilities Source: IBES, MSCI, Facset, Morgan Stanley Research, 7
Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 particularly when compared to cyclical industries Median Pictet value of GEM beverage sector/median Pictet value of GEM steel sector 6 5 4 3 2 1 0 Source: PAM EM database, 31 st January 2013 8
Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 30/09/95 30/09/96 30/09/97 30/09/98 30/09/99 30/09/00 30/09/01 30/09/02 30/09/03 30/09/04 30/09/05 30/09/06 30/09/07 30/09/08 30/09/09 30/09/10 30/09/11 30/09/12 Latin American equity valuations Latin American equity valuations are fairly valued relative to history but expensive compared to emerging markets P/Book: MSCI Latin America relative to MSCI emerging P/Book: MSCI Latin America as at 01/02/2013 markets as at 01/02/2013 3.5x 1.6 3.0x 1.4 2.5x 1.2 2.0x 1 1.5x 0.8 1.0x 0.6 0.5x 0.4 Source: IBES, MSCI, Facset, Morgan Stanley Research 9
P/Book ratios country view Brazil and Mexico are at opposite ends of their historic valuation ranges P/Book Value: MSCI Country as at 01/02/2013 EM APxJ China Korea Brazil Taiwan S.Africa India Russia Mexico Malaysia Indonesia Thailand Chile Turkey Poland Colombia Philippines Peru Egypt Czech Hungary Australia Hong Kong Singapore 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x Max/ 5Y Avg. /Min Current P/Book Source: IBES, MSCI, Facset, Morgan Stanley Research, 10
Earnings estimates for Latin American equities Earnings forecasts are finally stabilising MSCI Latin America level of eps 2013 and 2014 550 2014 2013 LATAM companies have larger operational leverage than their developed market peers Given the continuous downgrades over two year we could see a very strong EPS turnaround if global demand picks up 500 450 400 350 300 250 Feb-11 Feb-12 Source: BofA Merrill Lynch Global Research at 31/01/2013 11
Earnings estimated for the material sector Weight of materials within MSCI equity indices: GEM Materials sector level of EPS estimates 2013 & 2014 Latin America: 20.1% EM Markets: 12.5% China: 4.3% Downgrades continue but price forecasts for commodities have come very close to current spot prices. We believe that a turnaround in forecasts will come soon and could be very strong in this sector Source: BofA Merrill Lynch Global Research at 31/01/2013 85.00 80.00 75.00 70.00 65.00 60.00 55.00 50.00 45.00 40.00 Feb/11 Feb/12 2014 2013 12
An increasing number of Latin American companies are paying dividends Percentage of companies in MSCI LATAM & MSCI World that pay a dividend 100,0 90,0 80,0 70,0 60,0 50,0 40,0 98A 99A 00A 01A 02A 03A 04A 05A 06A 07A 08A 09A 10A 11A MSCI DM MSCI Latin America Source::Facset, CLSA Asia-Pacific Markets 13
Dividend growth Dividend growth in Latin American equities emerging markets has been greater than in other emerging and developed markets over the past ten years. Dividend per share index, re-based to 100 at 2000 600.0 500.0 400.0 300.0 200.0 Dividend sustainability less certain in Brazil 100.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 AxJ EM DM Latin America Source:Facset, CLSA Asia-Pacific Markets 14
Inflows in emerging equity funds are at historically high levels Inflows are at levels which have not endured in the past 23 consecutive weeks of inflows into emerging equity funds Cumulative US$64bn of inflows since QE3/ECB monetary stimulus GEM inflows as a percentage of market cap Source: Datastream, EPFR Global, Morgan Stanley 15
Conclusions Economic activity is recovering in China but the trend is yet to be confirmed in Latin America Dividend growth has been superior in Latin America but dividend sustainability is less certain in Brazil Value opportunities are available in the material sector and earnings momentum could be close to an inflexion point Our global emerging equity strategy is under weight Latin American equities Valuations in the traditional consumer sectors are challenging, we prefer to play the consumption theme through financials 16
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