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Broadgate: Weekly Briefing 4/4

4th April 2014

Emerging Markets – Emerging market equities have posted more than a week of straight gains, allowing the asset class to reverse the loss seen over 2014 so far.

The MSCI Emerging Markets Index has risen for nine days in row, advancing 0.2%. This means the index is heading for its longest running streak since January 2013.

FE Analytics shows the MSCI Emerging Markets Index is down just 0.25% over the year to date. It fell almost 6.6% between the start of the year and 14 March but has risen by close to 6.8% since then.

The move back to emerging markets has been prompted by speculation that the Chinese authorities will move to stimulate the world’s second largest economy, which is showing signs of slowing, and data suggesting that economic activity is picking up in the U.S.

U.S. – Growth in U.S. manufacturing accelerated in March from the previous month.

The Institute for Supply Management’s growth index rose to 53.7 from 53.2 in February. A reading above 50 indicates expansion. Manufacturing was spurred on by factories’ productivity as they recovered from the severe winter weather.

Meanwhile, U.S. construction spending also rose in February compared with January, said the Commerce Department.

Japan – Japan has raised its consumption tax for the first time in 17 years in an attempt to rein in public debt. From Tuesday, sales tax will increase from 5% to 8%. It will rise again, to 10%, in October 2015.

Prime Minister Shinzo Abe said he would continue to take “necessary action” to address livelihood issues and keep Japan’s economy on track.

The stepped tax increases are aimed at covering rising social welfare costs linked to Japan’s ageing population. Japan currently has one of the lowest birth rates in the world. It also has the world’s highest ratio of elderly to young people, raising serious concerns about future economic growth.

Trends – Investors fled Asian and North American funds this week, with outflows hitting record highs during the month of February, according to the latest figures from the U.K’s Investment Management Association (IMA).

The IMA monthly stats show some $156m was pulled from Asian equities over the course of the month while U.S. equity funds recorded $174m outflows over the same period. Both figures mark record outflows for each region.

Overall equities continued to be the best-selling asset class for the eleventh consecutive month in February with UK equity funds taking the top spot as the most popular region after recording net retail sales of $334m.

Russia – Funds investing in Russian and eastern European equities posted the worst performance over the opening three months of 2014 as the Ukraine crisis cast a shadow over the asset class.

Data from FE Analytics shows all ten of the first quarter’s worst performing funds specialise in Russian, emerging European or eastern European equities and all ten have lost money over the period.

Investors took flight from Russia after the country intervened in Crimea, eventually leading to the province voting to break with Ukraine and join the Russian Federation. This led to sanctions being placed on Russia by the E.U. and the U.S., with the situation still impacting market sentiment.

Asia – Stockmarkets in Asia have jumped after the Chinese government moved to ease the slowdown playing out in the world’s second largest economy.

A statement by the Chinese cabinet office says taxes will be cut for small businesses while the construction of railway lines across the country will be sped up.

“We will find innovative ways including fiscal and financial methods to … steady economic growth,” the statement added.

Both measures had already been announced as part of China’s economic plan for 2014. However, they had not previously be packaged together as a tool for boosting growth.

The move comes after China issued a series of disappointing economic reports, which heightened fears that the country is heading towards a so-called hard landing.

Spotlight on: Services sector boom to drive Emerging Market growth

Emerging market investors must take a closer look at the services being offered to developing world consumers if they are to unlock the real potential of the consumption story, according to Mark Mobius.

Franklin Templeton’s emerging markets veteran said service-based businesses are primed for rapid expansion.

He said this would be from a relatively low base and pointed to China, Nigeria and Indonesia as three examples of growing markets where service sector companies have limited penetration.

‘China has an unusually small share of services that comprises its GDP at 45% in 2012, the share was equal to the size of the country’s industrial sector – but it is not unique.’

‘In Indonesia, for example, services represented only 39% of GDP in 2012, while in Nigeria the figure was just 26%.’

Mobius said mobile services, such as telecoms and the use of smartphones, was an area of particular interest and expected further developments in both frontier and emerging markets.

‘Telecommunications companies have seen strong growth across emerging and frontier markets, with mobile services being particularly strong.’

‘Customers in many of these markets, especially in Africa, have been enthusiastic adopters of mobile technology, effectively bypassing traditional landline systems.’

This theme coincides with the growth of internet use for online retailing and money transfers as well, he said.

‘With legacy brick-and-mortar assets relatively scarce in many emerging markets, adoption of Internet-based trading has been rapid in many service industries.’

‘Latin American Internet trading platforms, Chinese online travel and ticketing businesses and African mobile money transfer businesses are examples of traditional service businesses adapting themselves to the online age.’

Mobius said Chinese-language internet portals have seen dramatic growth, as search engines and other value-added service businesses have benefited from the Chinese government’s reluctance to admit their U.S. equivalents.

‘Chinese consumers have been highly active adopters of mobile internet services and games, which in our view have provided a potentially large revenue stream to these businesses.’

Mobius runs 18 funds across emerging markets, emerging Europe, Asia, Latin America, China and frontier market equities.

BWB

The information set out herein has been obtained from various public sources and is by way of information only. Broadgate Financial can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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