Depending on the nature of the NBB, it may enhance or take away from shareholder returns. In this regard, the data shows evidence that poor corporate governance manifested by undisciplined capital management has suppressed returns in EM, with the result that earnings have grown at a rate well below GDP growth. NBBs had a an average negative 3.
Interestingly, NBBs for the U.
The second reason for the underperformance of EM stocks over the past decade is the mean-reversion of both valuations and the U. The twenty-year period is neatly divided into the first 10 years of EM stock outperfomance and dollar weakness and the following ten years of EM stock weakness and USD strength. Over this period, valuations in EM and the U.
But the basic calculations are changing for emerging markets as that growth potential dims — and with it, part of the core rationale for investing. When the Financial Times asks the question “Does investing in emerging markets still make sense?” and implies “no” in its answer, the.
The chart below shows the evolution of valuations for both markets using cyclically inflation-adjusted price-earnings ratios CAPE , a measure that smoothes out earnings and provides a better basis for comparison. The outperformance of the U. On the other hand, EM returns have been hurt by relatively high initial valuations, a strong dollar and negative net buy-backs. The individual investor in the United States has never had it easier, at least when it comes to the expenses incurred to get broad exposure to the global stock and bond markets.
The common investor now pays fees which are a fraction of the cost paid a few decades ago, and every year fees fall further. The collapse in fees has transformed the business of asset management in the United States, leading to a decline in active management and persistent concentration of assets in fewer firms. These trends are fast spreading to Europe and developed Asia. The primary shift in the asset management industry has been from high-cost actively managed products to low-cost indexed products in the form of both mutual funds and ETFs exchange traded funds.
As shown in the chart below, about 1. The average fee charged by funds has fallen from 1. The industry is rapidly consolidating in fewer players.
Many active managers are closing funds after milking their client-base for as long as possible. The data is further broken down in the chart below. The key data point to focus on is the asset-weighted cost of indexed mutual funds which was 0. Chinese quants Bloomberg. Oddities of the Chinese stock market Bloomberg. Guide to Quant Investing Bloomberg. Trends Everywhere AQR. Ten bits of advice from Buffett Seeking Alpha. Maintaining bank accounts and second homes offshore and educating their children in foreign schools provides an insurance policy to protect against eventual political and economic turmoil at home.
Slowing global growth and high risk-aversion have contributed to the strengthening of the U. This period has seen the rise of several very large new contributors, namely China, Turkey and Brazil, to the migration of wealth to safe-havens.. Not one of these countries played a big role in flight capital in the past.
Rich Brazilians, for example, historically have had a preference for high-yielding domestic bonds and local real estate, unlike their fleet-footed Argentine neighbors who for decades have taken their assets offshore.
But today, these countries are the primary drivers of capital migration. If you add the South Africans, who have been systematically moving both their assets and brain-power out of the country for decades, all of the BRICS Brazil, Russia, India, China and South Africa , the supposed engines of emerging markets, are seeing persistent capital flight.
India is possibly an exception, only because wealth creation is still greater than the funds leaving the country. The anecdotal evidence on this is overwhelming. Realtor transaction data point to one-third of total real estate transactions in Lisbon and Vancouver being transacted by Brazilians and Chinese buyers, respectively. The map below, prepared by VisualCapitalist. More detailed data on the origin and destination of flows is shown below. A few destinations are highly preferred as safe-havens, with Australia, the U.
In the case of Australia, the inflows are enough to have a material impact on the total stock of HNWI. The situation is particularly dire in Russia and Turkey where outflows represent a large part of the home HNWI population and have been persistent in recent years. This can be seen by looking in more detail at one segment: Brazilians in Florida. As mentioned above, Brazilians have a strong affinity for South Florida. Realtor data for the Florida market indicates that the Afrasia Bank report significantly understates flight capital from Brazil.
This brings the total of Florida homes purchases by Brazilians last year to 4, The chart below shows the persistent rise of Brazilian buyers in Florida since the great financial crisis. Interestingly, as the chart below shows, Brazilians are paying significantly more for Florida residence than other foreigners.
This is probably an indication that purchases are meant to be primary residences and not vacation homes. This bullish market has been propped up by confidence in a forthcoming trade deal with the U. This wishful thinking is most likely misplaced. Chinese policy makers are aware of the declining marginal returns on fixed capital formation investments and the lack of debt-capacity to fund them.
So, what is going on and what can we expect for the future? In addition, a significant slowdown in the global economy did not help. In typical bureaucrat-central-planning mode, Beijing immediately responded with stimulus to maintain growth on its preordained path. Both fiscal and monetary measures were introduced throughout and they appear to have worked their magic. Though policy makers would have probably preferred to apply stimulus to the consumption side of the economy, several factors conspired against this. Second, the effectiveness of consumer stimulus is difficult to predict, as the consumer may save more instead of spending the boost in income.
In any case, the stimulus has largely found its way to fixed asset investment in both infrastructure and real estate development, reverting the recent downward trend. These are areas where the government has great control over decisions and typically an abundance of shovel-ready projects, and they also immediately generate employment. This is shown clearly in the following chart from Gavekal. The chart shows clearly the downward trend in infrastructure and real estate development spending between and In mid this trend was reverted, and further data points to a strong upsurge under way shown in the chart below.
However, this upsurge in fixed assets investing is most likely of an emergency nature. Once Xi and Trump sign their trade deal and a modicum of normality returns to China-U. At that time authorities will be able to recalibrate and adjust policies, and it is likely they will seek to return to the previous path of managing the transition to a more consumer and service-driven economy. Emerging market equities continue to perform poorly relative to U. However, valuations are now back to attractive levels both in historical and relative terms, particularly compared to the richly valued U.
Furthermore, short-term prospects appear muted, as macro factors provide significant challenges. Experience tells us that EM assets perform well when there is strong global growth accompanied by a weakening U. What we have seen since , pretty much on a persistent basis, is relatively weak global growth and a strengthening dollar.
Personal Finance. Quotes for securities delayed 15 mins, quotes for crypto are real-time. Being wrong is a possibility investors face whether they buy stocks at home or abroad. Donnelley Financial, LLC. Any opinions, comments and recommendations in the Motif Investing Network "Network" are generated by its members and do not represent the opinions, comments or recommendations of Motif or any of its Associates. Emerging Markets Consumer 6. The Brazilian experience offers a useful insight.
This has led to a condition of tight global dollar liquidity, marked by consistent flows into dollar assets. Ironically, this condition of the markets has allowed for massive amounts of issuance of dollar-denominated debts by EM corporates, which now may face severe difficulties in refinancing these loans if the trends of global weakness and dollar strength persist. Nevertheless, the scenario is not all bad for EM assets. The charts below illustrate current market conditions. The first chart shows global liquidity as measured by the U. The second chart, from Yardeni. The third chart, also from Yardeni.
The recent uptick in the data is caused by the strengthening of the yuan and Indian rupee in recent weeks. On an equal weighted basis, the persistent strengthening of the dollar is still very obvious, and, overall, we can state that the dollar strengthening trend looks to be intact.
Finally, the third macro factor which is highly correlated to positive EM performance — the price trend of commodities — is shown below. The chart shows the recent surge in the CRB Raw Industrials index, and especially the metals component. In conclusion, macro factors are a mixed-bag. Global growth is weak and the dollar is strong; on the other hand, there are some signs of improved dollar liquidity and commodity prices are acting well.
The balance will tilt depending on China, with a recovery in the Chinese economy during the second half of this year supporting an improved environment for EM investors. The main reason to own emerging market equities is that after a long period of underperformance they are now inexpensive relative to their own history and compared to the U.
The dollarized nominal expected returns are derived by assuming that market Cyclically Adjusted Price Earnings CAPE ratios return to historical averages. The table points to attractive returns for EM equities over the period, compared to very low returns in U. Similar exercises by GMO Link and Research Affiliates Link shown below reach slightly different conclusions but all point to significantly superior returns in EM relative to other asset classes.
This is often driven by clients who demand large teams of highly paid experts involved in complex strategies in order to justify paying management fees. If a process is too simple and transparent, the client may conclude that the manager is dispensable. These computer-driven quantitative strategies are the image of simplicity and transparency and can be manufactured cheaply. This bad combination of lower fees and higher costs can only lead to a concentration of assets in those few active managers who can offer highly differentiated products.
Here are some highlights from the report which concern emerging markets funds:. Rolling three-year returns have also deteriorated, as shown in the following graph.
The warning is highly relevant for emerging markets investors for two reasons; first, EM corporates have been active particants in the ramp up of debt, eagerly satisfying the chase for yield that lenders have pursued in response to quantitative easing policies; second, EM borrowers can be expected to suffer disproportionately if the lending cycle were to turn sour.
Rob Kaplan of the Dallas Federal Resrve did not mince his words this week Link in issuing a stark warning of the risk to the economy caused by the buildup of U.