September 2017 Emerging Markets Outlook
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Growth Driving EM: Headwinds Abate 3
Global Fears: The U.S. dollar fully valued? The U.S. dollar has strengthened 39% since 2011; in prior periods of dollar strength (most of the early 1980s and in 1997-1998), emerging markets were in crisis, but not this time around Source BAML; HSBC. Data as of June 2017 (low chart) and March 2017 (upper chart). 4
11/1/2015 12/1/2015 1/1/2016 2/1/2016 3/1/2016 4/1/2016 5/1/2016 6/1/2016 7/1/2016 8/1/2016 9/1/2016 10/1/2016 11/1/2016 12/1/2016 1/1/2017 2/1/2017 3/1/2017 4/1/2017 5/1/2017 Global Fears: EM equity performance during U.S. rate hike cycles Emerging markets equity have historically reacted favorably during U.S. rate hike cycles 600 580 560 540 520 500 480 460 440 420 EM vs. Rate Hike - Feb 1994 - Feb 1995 MSCI EM Index (LHS) Fed Funds Target Rate (RHS) 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 520 500 480 460 440 420 380 EM vs. Rate Hike Cycle - June 1999 - May 2000 MSCI EM Index (LHS) Fed Funds Target Rate (RHS) 7.00 6.50 6.00 5.50 5.00 4.50 EM vs. Rate Hike Cycle - June 2004 - June 2006 EM vs. Rate Hike Cycle - December 2015 - May 2017 900 800 700 600 500 300 MSCI EM Index (LHS) Fed Funds Target Rate (RHS) 6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 1050 1000 950 900 850 800 750 700 MSCI EM Index (LHS) Fed Funds Target Rate (RHS) 1.05 0.95 0.85 0.75 0.65 0.55 0.45 0.35 0.25 Source VanEck, Bloomberg. 5
Global Fears: Populism and protectionism on the rise Global Income Distribution State aid is a key mechanism for trade discrimination Includes local procurement legislation, tax benefits for export and domestic industry subsidization, heightened regulatory standards, and public procurement discrimination Over the long haul, technology is a much bigger driver of trade than government policy Zero sum game China steps into the vacuum Source: Branko Milanovic (top chart). Merrill Lynch (bottom chart). Data as of December 31, 2016. 6
EM Macro: Emerging markets have less financial vulnerabilities Most emerging economies (with the exception of China) have floating currency exchange systems Currency flexibility is a natural progression from mercantilism and gives central banks more control over monetary policy Emerging economies are less vulnerable today due to major economic and financial reforms in the past decade External and fiscal accounts have significantly improved from the taper tantrum period Number of EM countries by exchange agreements Financial Vulnerability in EM Source: UBS (left chart) and Merrill Lynch (right chart). Right: Chart Data as of June of 2017. 7
EM Micro: EM companies earnings are exceeding expectations MSCI Emerging Markets earnings growth estimates (%) Often wrong, but never in doubt; 2017 a rare example of analyst EPS growth optimism coming true? BAML research suggests yes. EM 12m forward earnings estimates revisions accelerate Revisions to 12m forward earnings estimates in EM Source: BAML, HSBC. Data as of March 2017. 8
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EM Micro: Capex declining and free cash flow galore BAML predictions all time high free cash flow in Asia ex-japan 800 700 600 500 300 200 100 0 Asia ex-japan operating cash flow (US$ bn) 126 165186 14 16 20 22 28 44 53 48 52 54 53 76 236 277 Forecast 752 678 649 562 599 611 506 455451 403 346 361 600 500 300 200 100 0 65 81 85 50 13 18 24 27 32 41 55 Asia ex-japan capital expenditure (US$ bn) 130 102 63 78 256 212 177 Forecast 444 468488 482 454 452 445 413 354 369 314 350 300 250 200 150 100 50 0-50 -100 Asia ex-japan free cash flow (US$ bn) Forecast 339 233 196 157 117 90 89 48 63 56 59 65 86 72 38 1 2 12 13 7 7-2 -4-5 -4-2 -21-28 -36 Source: CLSA. Data as of December 2016. 9
EM Micro: EM selling at a 90% discount compared to the U.S. 120.00% PB - Relative Value (SPX vs. MSCI EM) 100.00% SPX vs. EM -1 STD +1 STD Average 90.50% 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% Source: Bloomberg, MSCI. Data as of June 2017. 10
EBITDA (Millions) Share Price EBITDA (Millions) Share Price Structural growth versus cyclical growth Structural Growth Cyclical Growth $9,000 EBITDA $140 $18,000 EBITDA $70 $8,000 Price $120 $16,000 Price $60 $7,000 $14,000 $6,000 $100 $12,000 $50 $5,000 $80 $10,000 $40 $4,000 $60 $8,000 $30 $3,000 $40 $6,000 $20 $2,000 $4,000 $1,000 $20 $2,000 $10 $- $- $- $- Source: VanEck. Data as of December 31, 2014. For illustrative purposes only. The information above is intended to demonstrate VanEck s investment process and strategies, and the types of investment opportunities VanEck may consider. Actual holdings will vary for each VanEck client. 11