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Money Flows to Emerging Markets
August 24, 2010
We often say that the global growth story is perhaps the planet’s most potent economic driver, and this opportunity is not lost on investors.
The Financial Times recently published an interactive map showing the growth of net private capital inflows into the key emerging market regions going back to the mid-1990s and through booms, busts and various regional fiscal and monetary crises.
Back in 1995, the combined net capital inflows to Latin America, Eastern Europe, Africa/Middle East and Asia ex-Japan was roughly $250 billion. A decade later, the same net inflow went into Eastern Europe alone and the total global figure topped $600 billion.
The peak is pictured above – in 2007, net private capital inflow totaled more than $1.2 trillion. Then came the Great Recession – in 2008, the number was less than half, with Asia falling from $413 billion to $107 billion. The net inflows are estimated at some $700 billion this year and about $750 billion in 2011.
Overall takeaway – global emerging markets are now well-established as an important asset class in the eyes of the investment community as the financial systems in these countries have matured and government policy changes have removed many obstacles that had impeded foreign investors.
And given GDP growth projections that far surpass those of the developed economies, the appeal of emerging markets is not likely to change any time soon.
Chart of the Week – Is Indonesia Overheating?
August 11, 2010
Indonesia’s 21 percent gain so far this year is tops in the region but is Asia’s hottest market in danger of overheating? Not exactly but there are a few concerns.
Inflation is beginning to become an issue. Food prices are rising at 14 percent a year, energy at 18 percent a year and land prices at 20 percent a year, according to CLSA. CLSA cautions that conventional monetary measures could make matters worse so policy changes—like an anticipated rise in interest rates—must be monitored closely.
This year’s performance has also pushed Indonesia’s valuation ahead of other emerging markets. Stocks in Jakarta trade at roughly 13.5 times earnings over the next 12 months while the MSCI Emerging Markets Index and the MSCI BRIC Index trade at around 11 times, according to a Bloomberg story.
However, it’s important to remember that Indonesia is starting from a very low base. Just two decades ago, only 21 companies were listed and today the country’s stock market remains one of the smallest as a percentage of GDP among major emerging markets.
Investible options are currently limited to energy, telecom and banking sectors and the number of domestic retail investors is less than one percent of the population. As more companies go public and market capitalization grows, increased liquidity should attract more foreign investment.
Domestically, the economy should benefit from its rapidly urbanizing population, rich natural resources, appreciating currency and political stability. All of these should insulate Indonesia’s economy from external headwinds and keep the country on a path of growth for the next five years.
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 BRIC Index is a free float-adjusted market capitalization index that is designed to measure equity performance of Brazil, Russia, China and India.
Home Prices on the Move
August 06, 2010
The U.S. housing market is still sputtering, but other places in the world are zooming.
CNBC.com recently did a slideshow showing 20 countries where home prices are rising. Many of the strongest markets are in western Europe, despite the region’s economic woes.
Housing in Britain has jumped about 9 percent over the past year. The average home in Central London costs nearly $900,000 -- about the same as in downtown Los Angeles.
Sweden, Norway and Finland all saw home prices rise by more than 10 percent over the past year.
Among emerging markets, India, Malaysia, South Africa, Singapore and Colombia all saw appreciation.
Then there’s China, where a 68 percent jump in key cities of China prompted government moves to slow things down on the property front. The average home price in Beijing cost nearly 20 times average annual income, according to data from CLSA.
Renters are also feeling the squeeze -- China’s Xinhua news agency reported last month that rental rates in Beijing exceeded the average monthly income for many of the city’s migrant workers.
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The Knight Frank Global House Price Index is compiled using official government statistical office or central bank data where possible. In some instances reliable indices from third-party sources have been used.
A Kinder, Gentler View of Outsourcing
July 16, 2010
Forget the conventional notion of job outsourcing to emerging markets as just exploiting the world’s most economically vulnerable – a new study from a major labor group finds that many of these jobs aren’t bad after all.
The International Labor Organization (ILO) says that service-oriented jobs are of “reasonably good quality by local standards.”
These are jobs like call centers, data-processing shops, financial back-office operations and the like. Worldwide, it’s a $90 billion market and it’s growing fast.
Geneva-based ILO based its assessment on in-depth studies in South America, India and the Philippines. It found that the typical worker is young, well-educated and female.
Indian workers in these service areas make nearly double the average local wage, and in the Philippines, the pay is about 50 percent higher.
ILO did have some criticisms – many of the jobs require night duty to accommodate employers on the other side of the world, workloads can be onerous and stressful, and as a result turnover is high.
But “the bottom line is that this is an industry with the potential to offer a model for a future of good quality service sector jobs and high-performing companies in the global economy,” ILO writes.
India remains the leading destination for outsourced jobs from North America and Europe, but the consulting firm KPMG says China is now getting the biggest chunk of the business from Asia and the Pacific Rim.
A survey of companies across Asia found that more than 40 percent had a service center in China and 40 percent had contracts with a Chinese third-party service provider. Singapore and India ranked second and third.
KPMG says China’s outsourcing market grew from $7.5 billion in 2007 to $20 billion last year, and that it will more than double by 2014.
Foreign Investors Get Keys to the Kingdom
June 11, 2010
For the first time ever, the Kingdom of Saudi Arabia is opening its doors to foreign investors in an effort to gain additional sources of investment for the government’s economic diversity plan.
The Saudi government announced foreigners were allowed to own property in the King Abdullah Economic City, known as KAEC, which is one of four economic cities included in a $400 billion infrastructure plan the government hopes will extend the country’s economic reach beyond oil.
Oil export revenues currently account for about 90 percent of the country’s total exports and for 40 percent of Saudi Arabia’s total GDP, according to the Energy Information Administration.The Saudis are hoping KAEC will change that by becoming the New York or Tokyo of the Middle East. It’s conveniently located on the coast of the Red Sea, between the Holy Cities of Makkah and Madinah, and is designed to house 2 million people and create 1 million jobs.
A port and a railway are being constructed to link KAEC with existing industries like plastic and aluminum that are already in the area. The city will also feature two new water desalination plants to bring clean water and power to its residents.
KAEC is already attracting attention from the business community. Bloomberg reported this week that French oil giant Total SA and U.S. chocolate maker Mars will have operations there.
The project has sputtered some in recent years as the global crisis hit the region hard but the decision to open up the doors to foreign investors should increase capital flows and move KAEC into the next phase of development.
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Net Asset Value
as of 09/02/2010
- Global Resources Fund
PSPFX $8.72 +0.08 - Gold and Precious Metals Fund
USERX $17.25 +0.18 - World Precious Minerals Fund
UNWPX $19.21 +0.13 - China Region Fund
USCOX $8.50 No Change - Eastern European Fund
EUROX $9.05 +0.03 - Global Emerging Markets Fund
GEMFX $8.15 +0.01 - Global MegaTrends Fund
MEGAX $7.67 +0.03 - All American Equity Fund
GBTFX $19.86 +0.15 - Holmes Growth Fund
ACBGX $15.79 +0.19 - Tax Free Fund
USUTX $12.61 No Change - Near-Term Tax Free Fund
NEARX $2.27 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change