Opportunities in Emerging Markets
In the first round of breakout sessions at Morningstar's ETF Conference 2010, David Semple, head of Van Eck's emerging-markets team, shared some of his insights into the space.
Semple's opening drive explained that contrary to popular belief, emerging markets do not afford investors an opportunistic asset class. Emerging markets account for a roughly 37% share of the global economy and have maintained growth premium throughout the tumultuous financial storm of 2008-09.
Commodities in these markets are no longer constrained by demand side drivers, as emerging markets have grown to command a majority share of global resource supply. Despite growth in the space, Semple notes that MSCI's 12% emerging-markets weighting is a marked under representation by even conservative global GDP estimates.
Sovereign debt is in much better shape than years past, and corporate debt remains low, as cash flow has exceeded capex and dividends. Van Eck is expecting free cash-flow yields of 5%-7% through 2011.
Emerging-markets payout ratios tend to be low, but there are several advantages over developed markets, like their lack of leverage-derived vulnerabilities. Emerging-markets growth remained in line with developed markets over the past decade but accelerated post-2008.
Semple noted that the emerging markets are held hostage by Wall Street fears over anemic growth, deflation, and developed-economy sovereign default in the short run. As emerging markets continue to open themselves to the global economy, their middle classes grow and their currencies look to appreciate. Moving away from the traditional mercantilist systems pervasive in emerging markets may pose difficulties, but Semple doesn't expect the boom-and-bust cycle that has traditionally plagued the space.
ETFs allow investors to tap previously inaccessible emerging markets, but Semple advises against overlooking equity- and nation- specific risks. Many of the largest holdings in emerging markets indexes are government owned and disregard the interests of minority shareholders.
Headlining national differences in the risks associated with emerging-markets exposure, Semple made note of the lack of investment options in China, leverage and political complications in Russia, and infrastructural deficiencies in India.
Semple doesn't find valuations in the space to be challenging or compelling, rather interesting, and predicts emerging markets maintaining growth premium in all but the worst scenarios going forward.
--Abraham S.H. Bailin
Globalization at Mach Speed
The lunch presentation at the ETF conference was given by Gregg Easterbrook. Easterbrook is the author of Sonic Boom: Globalization at Mach Speed, and is also a contributing editor at Atlantic Monthly. The theme of his presentation was the impact globalization was going to have on the world in the decades to come.
Throughout American history, we have been predicting the eventual demise of American power in the world. In a free market economy, it is impossible to predict the direction the market will take. As an example, if you told people in the 19th century that in 2010 only 2% of people would work in agriculture, they would have said the U.S. economy must have collapsed. The loss of manufacturing jobs is analogous to the loss of agriculture jobs at the beginning of the 20th century. Manufacturing is not as important as everyone thinks. We are creating a society where very few people work in factories, and this is a good thing.
Easterbrook thinks that the world is more stable today than at any time in history. For the last 25 years, we have had basically no inflation. With the advent of new farming techniques that have dramatically increased crop volumes, people have not had to worry about feeding themselves. The world's superpowers, United States and China, are friendlier with one another than any other superpowers in world history. This has created a stable economic environment where innovation is allowed to flourish.
2010 is very early in the globalization trend. The network effects are just getting started. In this world, ideas are more important than resources. In the past most ideas came from the developing world. Emerging markets are now contributing, and the continued freedom of women in the world is dramatically increasing the world's supply of ideas.
There will be more "un-commanded institutions." These are organizations that aren't controlled by anyone. Wikipedia and the global economy are examples of this phenomenon. In the new world, people will be able to govern themselves, and there will be less need for centralized decision-making.
Easterbrook is very positive on the global economy. The biggest problem he sees is the largest national deficit. Overall, the good things happening in the world far outweigh the problems.