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Emerging market equities – Assessing the regional prospects

Emerging market equities – Assessing the regional prospects



Even if we expect emerging market equities to outperform their developed market peers, country and sector differences, as always, will be significant.

A particular challenge is currently that sectors and countries that are sensitive to the effects on trade of COVID-19 related restrictions may lag as they did for much of 2018 and 2019, making them less appealing to investors. The alternative – taking refuge in domestic-oriented sectors – is also not an obvious option since the coronavirus pandemic has decimated domestic demand (see Exhibit 1).  

<Exhibit 1>

As US stocks have led the rest of the developed world, so Asia has led EM stocks

One of the key dynamics over the last five years has been the outperformance of the Asian region versus EMEA[1] and Latin America. It is actually China that has outperformed. The emerging markets Asia-ex China sub-group has only matched the performance of the rest of the index (see Exhibit 2), in many ways mirroring the outperformance of the US versus the MSCI World index.[2]

As yet, China does not take up as dominant a share of the EM index as the US does for developed markets. China accounts for just 41% of the MSCI EM index, while the US alone makes up 65% of the market capitalisation of the MSCI World.

<Exhibit 2>

It is difficult to see the laggards catching up…

Although EMEA and Latin America have lagged since the global market bottom in March 2009, it is hard to imagine a sustained period of outperformance now. The near-term economic outlook is challenging due to the coronavirus pandemic and Latin America has suffered particularly.

Credit metrics in the region are far worse than in the rest of emerging markets. Its share of corporate debt in hard currency is above average. Foreign sales account for a relatively small share of total corporate revenue and current account deficits are high.

EMEA fares better from a credit perspective (with the notable exceptions of South Africa and Turkey). While foreign debt is also high, the currencies have held up better. Trade exposure to western Europe is an advantage and, at least in central and eastern Europe, the pandemic has been well managed generally.

Key advantage for Asia and China: The exposure to tech

Even more so than in developed markets, the technology sector has outperformed the rest of the market dramatically (see Exhibit 3). EM Asia has a far higher exposure to technology than the other regions, and China in particular has more ‘new’ technology companies (internet retail and interactive media) than South Korea or Taiwan.

<Exhibit 3>

Another positive factor for Asia relative to developed markets is that market valuations of technology stocks are nowhere near the levels of those in the US. Relative ratios are close to the low end of historical ranges.

While China is more highly valued than other emerging markets, both the price-book[3] and price-earnings[4] ratio z-scores[5] are only slightly above average and are closer to the values of the other countries in the region if the tech sector is excluded.

The z-score for the price-book ratio for broad tech sector[6] in China is 0.6 against 1.4 in the US. And not surprisingly, the improving outlook for tech sector earnings because of the pandemic translates into higher expected earnings growth for those countries and regions.

Rebounding commodity prices to benefit EM equities?

In the short term, the one factor that would play to the strengths of Latin America and EMEA would be a continued rebound in commodity prices. Although the GSCI Energy & Metals index has risen by nearly 70% from the lows in April, it is still nearer the troughs over the last 10 years than the average (see Exhibit 4).

Even with a gradual and bumpy rebound in global growth, and perhaps permanent reductions in travel (both for tourism and commuting), a further recovery seems likely. Both Latin America and EMEA have a higher share of energy, materials and utility sector stocks in their indices than in Asia, and the sensitivity of the indices to the GSCI index is stronger, though much of that is due to Russia and Brazil.

<Exhibit 4>

Latin America and EMEA for now, but then it is Asia’s turn again

Emerging market equities have suffered another decade of underperformance versus developed markets, although recently, this has been more pronounced relative to the US than to the rest of the world.

Given that sentiment has already improved in developed markets as lockdowns are eased and that valuations, particularly in the technology sector, have become elevated, this may be a good time to rotate into emerging market equities.

In the near term, the commodity-sensitive regions – Latin America and EMEA – can be expected to outperform as oil and metal prices recover, and China may lag due to US-election related tensions.

Over the medium term, however, the big fiscal stimulus in China should feed through to the rest of the region and the dominance of Asia, and in particular China technology, should reassert itself.

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[1] Europe, Middle East and Africa

[2] The MSCI World captures large and mid-cap representation across 23 developed market countries.

[3] For a definition, see

[4] For a definition, see

[5] For a definition, see

[6] Broad tech includes information technology, internet retail, movies & entertainment, and interactive media industries.

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Daniel Morris. The post Emerging market equities – Assessing the regional prospects appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.

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Fighting the Surveillance State Begins with the Individual

It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in…



It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in place, collecting data on the entire populace. This has been proven beyond a shadow of a doubt by people like Edward Snowden, a National Security Agency (NSA) whistleblower who exposed that the NSA was conducting mass surveillance on US citizens and the world as a whole. The NSA used applications like those from Prism Systems to piggyback on corporations and the data collection their users had agreed to in the terms of service. Google would scan all emails sent to a Gmail address to use for personalized advertising. The government then went to these companies and demanded the data, and this is what makes the surveillance state so interesting. Neo-Marxists like Shoshana Zuboff have dubbed this “surveillance capitalism.” In China, the mass surveillance is conducted at a loss. Setting up closed-circuit television cameras and hiring government workers to be a mandatory editorial staff for blogs and social media can get quite expensive. But if you parasitically leech off a profitable business practice it means that the surveillance state will turn a profit, which is a great asset and an even greater weakness for the system. You see, when that is what your surveillance state is predicated on you’ve effectively given your subjects an opt-out button. They stop using services that spy on them. There is software and online services that are called “open source,” which refers to software whose code is publicly available and can be viewed by anyone so that you can see exactly what that software does. The opposite of this, and what you’re likely already familiar with, is proprietary software. Open-source software generally markets itself as privacy respecting and doesn’t participate in data collection. Services like that can really undo the tricky situation we’ve found ourselves in. It’s a simple fact of life that when the government is given a power—whether that be to regulate, surveil, tax, or plunder—it is nigh impossible to wrestle it away from the state outside somehow disposing of the state entirely. This is why the issue of undoing mass surveillance is of the utmost importance. If the government has the power to spy on its populace, it will. There are people, like the creators of The Social Dilemma, who think that the solution to these privacy invasions isn’t less government but more government, arguing that data collection should be taxed to dissuade the practice or that regulation needs to be put into place to actively prevent abuses. This is silly to anyone who understands the effect regulations have and how the internet really works. You see, data collection is necessary. You can’t have email without some elements of data collection because it’s simply how the protocol functions. The issue is how that data is stored and used. A tax on data collection itself will simply become another cost of doing business. A large company like Google can afford to pay a tax. But a company like Proton Mail, a smaller, more privacy-respecting business, likely couldn’t. Proton Mail’s business model is based on paid subscriptions. If there were additional taxes imposed on them, it’s possible that they would not be able to afford the cost and would be forced out of the market. To reiterate, if one really cares about the destruction of the surveillance state, the first step is to personally make changes to how you interact with online services and to whom you choose to give your data.

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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next

A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.



Updated at 11:52 am EDT U.S. stocks turned higher Monday, heading into the busiest earnings week of the year on Wall Street, amid a pullback in Treasury bond yields that followed the first breach of 5% for 10-year notes since 2007. Investors, however, continue to track developments in Israel's war with Hamas, which launched its deadly attack from Gaza three weeks ago, as leaders around the region, and the wider world, work to contain the fighting and broker at least a form of cease-fire. Humanitarian aid is also making its way into Gaza, through the territory's border with Egypt, as officials continue to work for the release of more than 200 Israelis taken hostage by Hamas during the October 7 attack. Those diplomatic efforts eased some of the market's concern in overnight trading, but the lingering risk that regional adversaries such as Iran, or even Saudi Arabia, could be drawn into the conflict continues to blunt risk appetite. Still, the U.S. dollar index, which tracks the greenback against a basket of six global currencies and acts as the safe-haven benchmark in times of market turmoil, fell 0.37% in early New York trading 105.773, suggesting some modest moves into riskier assets. The Japanese yen, however, eased past the 150 mark in overnight dealing, a level that has some traders awaiting intervention from the Bank of Japan and which may have triggered small amounts of dollar sales and yen purchases. In the bond market, benchmark 10-year note yields breached the 5% mark in overnight trading, after briefly surpassing that level late last week for the first time since 2007, but were last seen trading at 4.867% ahead of $141 billion in 2-year, 5-year and 7-year note auctions later this week. Global oil prices were also lower, following two consecutive weekly gains that has take Brent crude, the global pricing benchmark, firmly past $90 a barrel amid supply disruption concerns tied to the middle east conflict. Brent contracts for December delivery were last seen $1.06 lower on the session at $91.07 per barrel while WTI futures contract for the same month fell $1.36 to $86.72 per barrel. Market volatility gauges were also active, with the CBOE Group's VIX index hitting a fresh seven-month high of $23.08 before easing to $20.18 later in the session. That level suggests traders are expecting ranges on the S&P 500 of around 1.26%, or 53 points, over the next month. A busy earnings week also indicates the likelihood of elevated trading volatility, with 158 S&P 500 companies reporting third quarter earnings over the next five days, including mega cap tech names such as Google parent Alphabet  (GOOGL) - Get Free Report, Microsoft  (MSFT) - Get Free Report, retail and cloud computing giant Amazon  (AMZN) - Get Free Report and Facebook owner Meta Platforms  (META) - Get Free Report. "It’s shaping up to be a big week for the market and it comes as the S&P 500 is testing a key level—the four-month low it set earlier this month," said Chris Larkin, managing director for trading and investing at E*TRADE from Morgan Stanley. "How the market responds to that test may hinge on sentiment, which often plays a larger-than-average role around this time of year," he added. "And right now, concerns about rising interest rates and geopolitical turmoil have the potential to exacerbate the market’s swings." Heading into the middle of the trading day on Wall Street, the S&P 500, which is down 8% from its early July peak, the highest of the year, was up 10 points, or 0.25%. The Dow Jones Industrial Average, which slumped into negative territory for the year last week, was marked 10 points lower while the Nasdaq, which fell 4.31% last week, was up 66 points, or 0.51%. In overseas markets, Europe's Stoxx 600 was marked 0.11% lower by the close of Frankfurt trading, with markets largely tracking U.S. stocks as well as the broader conflict in Israel. In Asia, a  slump in China stocks took the benchmark CSI 300 to a fresh 2019 low and pulled the region-wide MSCI ex-Japan 0.72% lower into the close of trading.
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iPhone Maker Foxconn Investigated By Chinese Authorities

Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple…



Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple media reports. Foxconn’s business has been searched by Chinese authorities and China’s main tax authority has conducted inspections of Foxconn’s manufacturing operations in the Chinese provinces of Guangdong and Jiangsu. At the same time, China’s natural-resources department has begun onsite investigations into Foxconn’s land use in Henan and Hubei provinces within China. Foxconn has manufacturing facilities focused on Apple products in three of the Chinese provinces where authorities are carrying out searches. While headquartered in Taiwan, Foxconn has a huge manufacturing presence in China and is a large employer in the nation of 1.4 billion people. The investigations suggest that China is ramping up pressure on the company as Foxconn considers major investments in India, and as presidential elections approach in Taiwan. Foxconn founder Terry Gou said in August of this year that he intends to run for the Taiwanese presidency. He has resigned from the company’s board of directors but continues to hold a 12.5% stake in the company. Gou is currently in fourth place in the polls ahead of the election that is scheduled to be held in January 2024. The potential impact on Apple and its iPhone manufacturing comes amid rising political tensions between politicians in Washington, D.C. and Beijing. Apple’s stock has risen 16% over the last 12 months and currently trades at $172.88 U.S. per share.  

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