Insights into Emerging Markets

investment1
Interest Rate Hikes and Emerging Markets

  • As a result of next week’s virtually certain interest rate hike in the United States, emerging stocks and currencies had a second straight week loss on Friday (10th March). The move is expected to hit emerging equities and currencies. Weirdly, in this world of uncertainty, on Monday emerging markets stocks recovered by the strong showing of metals stocks, China’s economy showing new strength with Brazil and India rallying.
  • There are many reasons as to why the interest rate hike will affect emerging markets. One example is that higher interest rates could potentially decrease foreign investment

investment2

Super Rich and Ultra Rich of the Emerging Markets

Insights from The Knight Frank’s 2017 wealth report reveals that the Emerging markets are minting new millionaires.

  • Tanzania’s ‘super rich’ reached a total of 2,400 after creating 200 new dollar millionaires in 2016 which is an increase of 9% compared to its performance in the previous year.
  • Despite its impressive performance, Tanzania came second to Kenya in East Africa which created 900 new dollar millionaires.
  • Vietnam has 200 ‘ultra-high net worth individuals (people with investable assets of at least $30 million, excluding personal assets and property). The group is growing faster than any other economy in the world and on track to continue the growth into the next decade.
  • With a 12% increase, India ranked sixth in terms of ultra-high net worth individuals but is expected to reach third within the next decade. The country currently has around 2% of the world’s millionaires (13.6 million) and 5% of world’s billionaires (2,024).

Bitcoin

Bitcoin – quick update on the previous blog

  • On 2nd March, Bitcoin’s worth was more than gold. It may seem as though much of it was fuelled by speculation that a bitcoin ETF could be approved by the Securities and Exchange Commission (SEC) as the currency’s value fell by 18% from nearly $1,300 to $1,060 after the proposal was declined by the SEC. However, the value of Bitcoin has since recovered to $1,233 as believers have taken the set back as just as another challenge.

From the Wall of Worry to Hard or Soft Brexit

The “Wall of Worry” has now shifted to “Hard or Soft Brexit”. French President François Hollande is calling on the EU to take a hard line in the negotiations with Great Britain to prevent more defections from the EU. This has had a chilling effect on the GBP and increases the likelihood of either very low growth or a recession in the UK during 2017. Either way, the GBP has depreciated against all major currencies since June 2016, and it appears that it will stay weak.

hard-boiled-eggs-1129698_1280

This does not mean that the FTSE 100 will be a bad investment as 70% of the earnings of the companies in the FTSE come from outside the United Kingdom. European corporate earnings growth should be positive in Q4, driven by an improvement in global growth, stable to positive commodity prices, and strong growth in East Asia at 5% in 2017. The Japanese yen appreciated against the dollar, euro, and GB and, while lowering expected GDP growth from earlier expectations, the Japanese economy is expected to remain in growth mode.

Latin America has been dragged down by Brazil over the past two years but they appear to have turned the corner and expect 1.6% GDP growth in 2017. With the help of good growth in emerging markets and stable commodity prices, we are expecting a continuation of the “Low and Slow Growth” as the global economy approaches a 2.4% rate.

cashbox-1642989_1920

For the third quarter of 2016, the International Equity Portfolio returned 6.22% (pure gross) and 6.21% (net) versus 6.50% for the MSCI-EAFE Index. The portfolio returned 8.33% (pure gross) and 7.06% (net) for one-year versus 7.06% for the benchmark. Stock selection and/or country weightings in Germany, Switzerland, Taiwan, South Africa, and Singapore aided the portfolio’s performance. However, stock selection and/or country weightings in Hong Kong, Brazil, Finland, Belgium, and Australia hindered performance. In relation to sectors, positions in electronic technology, producer manufacturing, consumer non-durables, consumer services, and transportation aided performance. Sector positions in technology services, health technology, communications, non-energy minerals, and finance hurt the portfolio’s return.

coins-1523383_1920

The International Select Portfolio returned 10.51% (pure gross) and 10.01 (net) versus -6.50% for the MSCI-EAFE Index. The portfolio returned 13.31% (pure gross) and 11.29% (net) for one-year versus 7.06% for the benchmark. Stock selection and/or country weightings in Switzerland, the United Kingdom, China, Japan, and France aided the portfolio’s performance. However, stock selection and/or country weightings in Hong Kong, New Zealand, Taiwan, and India hindered performance. In relation to sectors, positions in electronic technology, producer manufacturing, consumer non-durables, health technology, and energy minerals aided performance. Sector positions in industrial services, distribution services, consumer durables, non-energy minerals, and finance hurt the portfolio’s return.

tax-468440_1920

The United States has much influence in the global growth of the world and we have seen populism arrive on the political scene in the United Kingdom, Italy, and other nations. In this Presidential election, both candidates have promoted protectionism which Moody’s Madhavi Bokil has called harmful for global growth. Hopefully, a congress that supports free trade will rule the day and the “Low and Slow Growth” economy will grow at a projected 1.5% in 2016 and 2% in 2017.

euro-870757_1920

Both portfolios’ high conviction, lower turnover investment philosophy/strategy, which combines quantitative and fundamental based analysis, should prosper in this environment.

The International Equity Portfolio

The big story in the news this week was the extraordinary loss reported by BHP Billiton. The Anglo-Australian mining giant recorded the worst loss in its history to the tune of around $6.4 billion annually. Along with an unavoidable dam collapse in Brazil, the company has suffered due to the continued slump in commodities prices.

excavators-1050501_1920

Also in the news, further stories keep trickling in detailing post-Brexit fall-out. Although the UK economy appears to be dealing with the situation far better than had been predicted by some, many sectors – such as IT, Finance, and Corporate Property – have been feeling the heat, with the pound still on shaky ground, international deals being pulled out of, and jobs being cut.

 

Last week, RBS announced that a large IT project originally due to be undertaken by Indian tech firm Infosys would no longer be going ahead triggering an “orderly ramp-down” of around 3000 employees. Banks and Finance firms are creating significantly fewer jobs too, moving roles to outside of the UK, according to recruiters Morgan McKinley.

usb-1284227_1920

Despite this, our International Equity Portfolio performed reasonably well last quarter, returning 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Although stock selection and country weightings in India and Australia hindered performance, weightings in Spain, Germany and Japan boosted it, as well as selections in the communications, health technology and consumer durables sectors.

 

The Henry James International Portfolio is a large capitalization international portfolio; it takes advantage of the international economy while seeking long-term capital appreciation. As with all our Emerging Markets Portfolio  The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently-priced international stocks with superior return-versus-risk characteristics. This is combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the management team over weights highly-ranked countries and under weights lower-ranked countries. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria. The primary performance benchmark is the MSCI-EAFE.

euro-447209_1920

To learn more about this, or any of our portfolios, please get in touch via email at info@hj-intl.com, by telephone on 917-951-5170 or by heading to our website.

 

(Please note: Henry James International does not currently holds a position in RBS.  Henry James International does currently own BHP and INFY for client portfolios).