Global EM Positioning: What You Should know - InvestingChannel

Global EM Positioning: What You Should know

Relative to weightings in the Global MSCI EM Index, there are countries that are hot and some that are not, and it’s not all based on fundamentals. We care because hot markets have priced in good news and cold markets may offer opportunities once a catalyst changes sentiment.

Image courtesy Rafael Matsunaga: http://www.everystockphoto.com/photographer.php?photographer_id=32783

As an investor in emerging markets it’s also important to understand just how active and concentrated the “local” market is to the foreign market. In some EM markets the overall positioning weightings are totally determined by locals ( local banks, insurance, pension and, portfolio investors, etc.) and in some they are markets they are only a very small part of the total positioning in the market itself and the flows are primarily foreign driven. For example, Brazil is dominated by locals, Taiwan is not. South Africa is dominated by locals, Mexico is not.

Here is a chart from EFPR, who does great work on EM and global fund flows. As you can see from the figure below, India, Brazil, South Africa, and Russia are overweight markets currently. India is far and away the destination for foreign investors in EM. We have discussed the India overweight going into the budget speech last week. I’m hearing there are some funds who are 2-3X bench weight in India. With a 12.1% positioning versus a 7.1% weighting India is most exposed to a reversal of investor sentiment. Fundamentals in India are improving with lower inflation and reform getting support across key sectors. India trades at a reasonable multiple (16.4X) relative to its history. Right now I would be wary of India only in a broader global pullback. Investment cash is looking for higher yielding markets and better macro. India thrives in a lower oil price environment and global disinflation. The Rupee could actually appreciate significantly again once the market feels RBI is done cutting (3Q?).

Note that Brazil is perversely also overweight. Brazil is running 9.7% weighting versus the 8.6% index peg. To most US investors a look at Brazil means PBR, VALE, and some banks. We all know how well (not well!) PBR and VALE have done. While fundamentals and macro are not overly Brazil supportive, the locals have little choice but to own equities with compressed yields on fixed income investments. The dividend yield on the Bovespa is 4.3%. If you are a local you are investing in local currency terms, the rout in the BRL is not an issue. If you are a USD investor the currency has been THE reason Brazil has been challenging in 2015, despite the local Index is +1.46% YTD (the EWZ is -8.7% YTD).

South Africa is overweight (7.95% v 7.8%) and Russia is overweight small with 3.4% v 3.3%. South Africa is dominated by local insurance companies and mutual funds. Russia is a unique situation. Russia also btw has seen its global weighting cut in half in the last few years. When this was my focus market in the early to mid-2000’s it got as high as 6%chart

On the “Underweights”: What is somewhat counter intuitive to our view over the last year that Asia would be the top performing region in EM(it has been by over 350bps), the major markets of China, Korea, and Taiwan are all significant underweights.   Korea is at 48% of its typical benchmark in weighting (7.7% v 15%). This is a major underweight when you consider that this is the second largest market in EM weightings. Korea has underperformed over the last year but has turned it up in 2015 (+4.2%).   On some level Korea has suffered where Japan has thrived. Some refer to Korea as yesterday’s Japan but yesterday’s Japan is acting like todays Korea. The Korean Won has struggled to keep pace with the falling Yen and this has been a major headwind to Korean industrials and exporters. Korea at 10.58X is cheap but not absurdly cheap to its own history. We have a have an OVERWIEGHT allocation to the EWY (the iShares South Korea ETF) in our EMCAI (Emerging Money Global Allocator Index) Index.

China not surprisingly has been an underweight (19.4% v 22.6%) when thinking about macro and some of the regulatory challenges China has thrown into the markets. Clearly the local index (CSI300) has been a monster outperformer versus other local EM bourses but one must consider the closed nature of this market and the drivers which have been local liquidity with nowhere to go.

In our Emerging Money Country Allocator Index we endeavor to “allocate” across country emerging market ETFs based on our view of optimal fundamental and technicals. We do not seek to correlate with MSCI EM country weightings similar to those discussed above. Please refer to our recent March rebalance to follow our current outlook and country investment views.

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