Battle of the indices: which emerging markets to invest

Swiss Bank Credit Suisse predicts significant growth of trading on emerging markets and plans to increase the presence of them as a proxy for large investors. This is stated in the Bank’s strategy, developed in his division of global wealth management. By 2020, the securities markets in developing countries will annually to overtake the developed countries by turnover more than doubled, according to a document Credit Suisse.

The Bank forecasts that the total volume of trading on the stock exchanges of the BRICS and Latin America will every year increase by 12% per year, whereas in developed countries only 6%. As a result, by 2030, the market capitalization of emerging markets will grow at an astronomical $160 trillion. This momentum Credit Suisse analysts associated primarily with the increase in the purchasing power of the population — mainly due to the increase in incomes of the middle class and the wealthy.

Now, according to Credit Suisse, the customers of private banks in developing countries with state from $1 million to have accumulated assets by about $12.9 trillion, of which about 40%, or $4,95 trillion, belong to the super-rich citizens. For comparison: in developed countries, where wealthy clients of banks have assets of $19,8 trillion, the share owned by the super-rich people, two times less — 20% or $3.96 trillion. In the future, Credit Suisse expects the growth rate of capital of the rich in developing countries at 11% per year, whereas in developed only 4%. This dynamic will stimulate the growth of investment in the stock markets of Asia and Latin America, as wealthy customers become more invested in financial instruments. Along with the trading volume will increase and profitability, consider in Credit Suisse.

Base for growth

The majority of experts surveyed by RBC, agree with the estimates of the Swiss Bank: investment in emerging markets is one of the key long-term strategies today. According to the analyst of the company “Discovery Broker” Andrei Kochetkov, in conditions when the economies of China and India growing at an average of 5-7% per year, and Europe and the United States — at best 1-2%, investment in securities in developing countries will provide higher yields.

“The stock market always reflect the capitalization of the total growth in the value of companies”, — the expert explains. In the coming years, the differential in GDP growth between developed and developing markets to grow two times in favor of the latter, adds the head of Department of investment products “KIT Finance Broker” Yuri Arkhangelsk.

He explains that most emerging markets will receive a boost to growth due to the recovery in prices for raw materials in connection with the acceleration of the global economy, which increases the demand for hydrocarbons and metals. According to forecasts of Fitch rating Agency, if in 2016, the global economy grew by 2.5%, in 2017 growth will be 2.9%. “If the global economy will really accelerate, to grow, and the appetite for risky assets. Investors will once again pay attention to emerging markets, which will allow them to show the growth of capitalization and increase of the trading turnover on the exchanges,” says analyst CC “Finam” Bogdan Zvarich.

Where to invest

According to the consensus forecast of 16 analysts surveyed by Bloomberg in the period from 23 January to 1 February this year the best assets for investment in emerging markets will be the Russian and Brazilian paper. Your choice of experts explain the trend to lower interest rates in Russia and Brazil amid improving macroeconomic indicators and high profitability of speculative transactions carry trade with the Russian ruble and the Brazilian real. 13 out of 16 analysts recommend buying this year’s sovereign and corporate bonds of Brazil and nine analysts gave a similar recommendation in relation to the Russian sovereign bonds. Also, eight out of 16 analysts are betting on the strengthening of the real and the ruble.

In the view of Russian financiers range of investments can be wider. Yuri Arkhangelsk from “KIT Finance Broker” considers the most obvious choice shares of Russian and Turkish companies. He notes that the Russian MICEX index and the Turkish BIST 100 traded with low ratios P/E (price/earnings). This means that stock markets are still not overbought and retain the potential for growth. Also, the Russian and Turkish indicators are characterized by high dividend yield (about 4 and 3%, respectively) and relatively low EV/EBITDA (enterprise value to its earnings before taxes, interest and depreciation), which reflects the payback period of the investment.

“The companies from MICEX index this indicator is one of the lowest among developing countries — five years,” explained the Archangel. The list of other indices that can provide return of capital in a relatively short period of time, are the market indicators for Argentina, Kazakhstan, Chile and Hong Kong (see table). Of them, except Russia and Turkey, only one is trading with a low coefficient P/E, and with a little indicator EV/EBITDA Kazakhstan KASE.

In addition to shares, good investment can become Eurobonds of developing countries denominated in dollars and euros, said Andrei Kochetkov of the company “Opening Broker”. For example, the Turkish corporate bonds, which are at attractive price levels due to the devaluation of the Turkish Lira against the dollar by more than 20% since the beginning of 2016. To them also it is necessary to add sovereign bonds of Turkey and Mexico, according to the Deputy Director of asset management Department of MC “Alfa-Capital” Eugene Kochemasov. According to him, the reaction of investors to political crises in these countries in 2016 was excessive. Now the government bonds of the two countries traded at a lower price. Meanwhile, the fundamental factors speak in favor of Turkish and Mexican economies, so in the future the sovereign bonds of these countries must move towards growth, concludes Kochemasov.

The main risks

Investing in emerging markets, we should not forget about the specific risks associated with them, reminds Kochetkov from “Opening Broker”. Chief among them is the inflated return expectations. “Emerging economies sick children growing pains and may face excessive revaluation of the prospects,” — says the expert.

Deputy General Director for investment analysis of IR “Zerich capital Management” Andrey Vernikov also considers that talking about long-term investment attractiveness of these markets yet. One of the reasons investors do not understand what to expect of US trade policy toward China: an American President Donald trump has repeatedly accused the country in the artificial undervaluation of the yuan, and threatened Beijing’s currency wars. However, even with the best outcome for the PRC assets of developing countries will exert pressure stronger dollar.

“In March of this year, the Federal reserve may resume the cycle of rising interest rates, which will boost the dollar. Given that in a number of developing countries have very large external debt denominated in dollars — the fed’s policy will affect their markets is not the best way”, — said the financier. Vernikov much less optimistic than analysts at Credit Suisse. Yet, in his opinion, investments in emerging markets look short-term strategy with a horizon to a maximum of six months.