Emerging markets Investment ViewPoints

13/12/2010 From Johannesburg to Moscow, via Rio... 12/11/2010 A perfect storm? 14/10/2010 Is it all fun and games for emerging markets? 18/08/2010 Sayonara Japan………..ni hao China? 11/08/2010 The Brazil nut, not so hard to crack... 20/07/2010 Global Reach – Consider Korea? 26/03/2010 China: The rise of the renminbi 23/09/2009  A taxing time for Brazil 25/09/2009  Brazil: time to smell the coffee? 28/08/2009  No immunity from uncertainty 03/07/2009  Emerging markets: ready for recovery?

 

13 December 2010 - From Johannesburg to Moscow, via Rio...

Last week, English football fans looked on aghast as Russia won the bid to host the FIFA World Cup in 2018. Although sporting hopes were dashed, the Russian victory may present UK investors with interesting opportunities. For what will be the third time in a row, the tournament is heading to an emerging nation.

Russia is by no means the first emerging nation to host such a huge occasion in the world of sport, or even football. In fact, if recent trends are anything to go by, emerging markets are by far the most popular choice. As referenced in a previous Investment ViewPoint, (Is it all fun and games for emerging markets?), the 2008 Olympics were held in China, this year South Africa and Delhi welcomed the World Cup and the Commonwealth Games respectively, Poland and the Ukraine will co-host the next European football championship; and Brazil faces the challenge of a double header – the World Cup in 2014 and the Olympics in 2016.

Investors should think about the implications of Russia’s bid victory. An event like the World Cup will demand considerable expenditure. The Government will need to pump money into infrastructure, telecommunications, transport and tourism, to help the country prepare for the inevitable influx of visitors and media.

In exchange, those visitors will all be spending money and boosting the Russian economy. In other words, this event may well improve Russia’s investment prospects.  Of course not all people share this view. During the last World Cup, some observers questioned the long term economic benefit a country gets from hosting such an event.

What is certain is that Russia will be thrust into the media spotlight, and there will be potential for economic return on investment. Investors who have a positive view on this and are looking for investment exposure to the country may want to consider Exchange Traded Funds (ETFs) and managed funds. 

For example, an ETF such as the iShares MSCI Russia Capped Swap* tracks the performance of the MSCI Russia Capped index. Alternatively the iShares MSCI Eastern Europe 10/40 is an ETF that aims to track the MSCI Eastern Europe 10/40 index, which currently has almost 69% exposure to Russian equities.

Investors can also use managed funds, designed to provide exposure to Russian markets. One example is the Allianz RMC BRIC Stars fund, which has almost 20% invested in Russian equities.  An alternative would be a specialist sector fund, designed to focus solely on Russia, such as Neptune’s Russia and Greater Russia fund.

Remember that investment into emerging markets using ETFs or funds is not without risk. Emerging markets investments are generally subject to higher risk than other investments. Their value may suffer greater volatility and you may receive back less than you invested.

 

* The iShares MSCI Russia Capped Swap is an ETF that tracks index performance through the use of over collateralised and muti-counterparty swap contracts as opposed to being an ‘in specie’ ETF that aims to physically replicate the index.

 

12 November 2010 - A perfect storm?

Last week the markets experienced a mini-perfect storm of economic data, which went on to trigger an equities rally. The US mid-term elections, along with the much anticipated announcement from the Fed that they would relaunch their quantitative easing plan - ‘QE2’ – were the two weather systems that combined to drive this. In the UK, the FTSE 100 enjoyed the warm glow of the US sun as the index hit a two-year high of 5,862.79 points.

The general hope now is that the fragile recovery in the developed markets will stabilise into something stronger.  Many will be curious to see which other economic policymakers choose to follow suit.

It was not just the equity markets that rallied on the back of the good news; commodities also saw their prices strengthened by the Fed’s decision.  In particular, gold and silver hit new highs, as fears grew that the Fed’s intervention could fan the flames of inflation.  Inflation is the major concern for policymakers thinking about their QE2 policies. Many investors consider precious metals a way to hedge against inflation and it appears that the markets share this view.

Currencies were also on the move last week. Sterling hit its highest level against the US$ since the beginning of the year.  The Bank of England decided against jumping on the Fed’s coat tails as far as a fresh injection of capital was concerned, instead remaining averse to fiscal tightening and keeping interest rates stable at 0.5%.  No change is anticipated until 2011.

Is the latest surge in equity values built on solid foundations and set to continue, or could it just be a tentative step along the road of this fragile economic recovery?  The UK government announced an austere Spending Review package in October, and although some would say this has been priced in to the markets, there remain concerns that the balance is still too delicate.  The bears say there will be lean times ahead. However the bulls will be pointing to last week’s strong UK growth data and surveys indicating that manufacturing and service sector activity is still growing, saying that the UK economy is robust enough to tough it out.

Compass

In the November/December issue of Barclays Wealth’s Compass publication, Aaron Gurwitz, Barclays Wealth’s Chief Investment Officer, considers last week’s events and offers his outlook on the markets.  Log in and read Compass to find out more.

Overall, Compass continues to hold the view that the emerging economies will still provide the most attractive risk adjusted-returns. Investors who share this view and are looking for exposure to the emerging markets economies might be interested to find out more about the latest Structured Product available through Barclays Stockbrokers. 

The new Emerging Markets Autocall Accelerator from RBS offers a possible 20% fixed return after two years if the MSCI Emerging Markets Index is then above its starting level or, if not, a return based on any rise in that index after the full term of five years.  Investors considering this product should be aware that their capital is at risk and they could lose some or all of their investment.

Remember that you can login and use our online Research Centre to keep pace with market movements or have a look at our top 10 equity buy and sell lists to see what stocks your fellow clients are trading.

 

14 October 2010 - Is it all fun and games for emerging markets?

The Commonwealth Games have once again focussed the world’s attention on the emerging and developing markets. It is not all rosy for this year’s host – India, as some questioned the organisation of these games. Let us hope Glasgow fares better in 2014….

The more interesting point for us is whether these events have an impact on India as an investment region? This remains to be seen.

However, the fact that developing markets are hosting global events is testament to their impressive growth over the past 20 years. There are some people that would not have thought India would get to host the Commonwealth Games, or that South Africa would hold the football World Cup.  

Indeed, attracting a global sporting event is becoming something of a trend for the emerging nations – the Olympics went to China in 2008, the next European football championship will be co-hosted by Poland and the Ukraine, not to mention Brazil’s upcoming World Cup and Olympic Games double header in 2014 and 2016. Read the Brazil Nut(a previous ViewPoint), for further insight into Brazil.

Two recently published pieces of research agree that the investment case for these regions remains strong. The Credit Suisse Global Wealth Report 1 (published October 2010), takes a comprehensive look at the state of world wealth. The report details that “wealth growth in India has been fairly steady”, “the rise of personal wealth in Indonesia has been spectacular during the past decade, with average wealth growing by a factor of five” and wealth in China is “close to the pre-crisis peak”.

These are big figures. South Africa, the football-loving nation mentioned earlier, is held up as “the economic model for many African countries.”

Both the concept and the statistics are important.  Most analysts agree that growth potential in emerging markets will depend largely on the development of an internal consumer culture. Spending power goes hand in hand with wealth and the affluence of a country will not grow without purchasing power.

Building a globally diverse portfolio can have its advantages. The latest issue of Barclays Wealth’s Compass report 2 (login to view compass), diagnosed developed countries (like ours) with a “failure to thrive”. Following the severe economic crisis of recent times, developed economies have not recovered at the speed that many had hoped they would. However, growth rates in the emerging markets moving faster.

The malaise plaguing the developed countries “adds one more powerful reason to shift risk into the world’s most rapidly growing regions”. Emerging markets can help to diversify your portfolio and are already a popular choice with many clients. Emerging markets carry greater risks than those of the developed regions; particularly in some of these areas which have unstable political and economic systems.

However, there are ways to ease yourself in – and give you exposure to emerging markets companies and industries, without having to do a lot of research on the specifics. With ETFs you can simply track the market or region of your choice, whereas with funds, you are investing in the expertise of a fund manager and delegating the investment decisions in an emerging market to them.

These are popular methods for investors to tap into the emerging markets growth story.  In fact if you look at many of the entrants in our weekly top 10 ETF purchases or monthly top 20 fund purchases, you will see several emerging markets products rank highly, such as iShares MSCI Emerging Markets (IEEM) and iShares MSCI Brazil (IBZL) on the ETFs list and funds such as Aberdeen Emerging Markets and First State Indian Subcontinent.  Many of our clients are already playing the game!

Remember that investment into emerging markets using ETFs or funds is not without risk. The value of your investments can fall as well as rise and you may receive back less than you invested.

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1. Credit Suisse, Research Institute, Global Wealth Report

2. Barclays Wealth Compass, Investment Recommendations, Europe, Middle East & Africa

Login to view Compass

 

18 August 2010- Sayonara Japan………..ni hao China?

In addition to striking fear into the hearts of the organisers of the London 2012 Olympics, the invention of silk and having a really, really long wall, China has a new accolade to add to its name.

This week, Japanese officials admitted defeat and handed the second-largest-economy-in-the-world crown to China.

Following an unexpectedly poor economic performance and the absence of any decent growth in the first or second quarter of 2010, Japan has slipped to third place in the economic world rankings.

• China’s Q2 GDP - $1.337 trillion
• Japan’s Q2 GDP - $1.288 trillion
• Chinese economy grew by 11.9% and 10.3% in Q1 and Q2
  
  

The news gets worse for Japan. Far from being a blip, economists predict that China will go on to secure this position over the next half of the year.

Although some experts feel this week’s events are more important from a symbolical standpoint than an economic one (for one, the International Monetary Fund marks 2001 as the time when China overtook Japan), the news is certainly interesting for investors considering China.

Proof is in the pudding

While this is interesting news, the landmark event will not necessarily come as a huge surprise to Barclays Stockbrokers clients, who have been voting with their feet (or rather their wallets) on this topic for some time.

The appetite for investment in China has been boosted over recent years by general economic sentiment and as a result, the nation is typically seen as the front runner of the emerging markets. Conversely, investment feeling on Japan has been more conservative. ‘The lost decade’ of the 1990s, where Japanese economic growth lagged the other global developed economies, still casts a shadow over investor optimism.

In the world of funds, the regional frontrunners for Barclays Stockbrokers clients are Gartmore China Opportunities and Invesco Perpetual Japan, and the figures speak for themselves. Gartmore’s China offering has three times as many clients invested and five and a half times the amount of money.

The difference is not quite as pronounced when it comes to Exchange Traded Funds that track the two markets, but the preference of Barclays Stockbrokers clients is still plain to see. The iShares FTSE/Xinhua 25 (FXC), hailing from China, attracts 36% more investors than the iShares MSCI Japan (IJPN), and has 63% more assets invested.

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1 Telegraph.co.uk, 17 August 2010

 

11 August 2010 - The Brazil nut, not so hard to crack...

A Goldman Sachs analyst singled out Brazil as one to watch way back in 2001, when he coined the acronym ‘BRIC’ to describe the emerging economies of Brazil, Russia, India and China. Ever since, investors have been intrigued by the country’s potential.

Brazilian Bites

• 10th largest economy in the world
  
• 5th largest land mass
  
• GDP of $1,574bn in 2009¹
  
• Population of 192 million²

Famous for football, sunshine and samba, Brazil has had a lot of attention from the media and individual investors and it is easy to see why.

It is hard to argue with the fundamentals. Over the last decade the BRIC nations have made up over a third of the world’s GDP³ and account for 40% of the world population.

Hungry for more

Brazil is a fairy tale growth story.

The global financial crisis that crippled economies last year has not touched Brazil in the same way.  The country has a growing middle class that is becoming wealthier and as a result has more spending power.

Brazil has continued to perform strongly this year. The figures speak for themselves :

• Growth - the economy grew at its fastest rate in 14 years in the first three months of 2010, a rate six times that of the UK’s and 9% ahead of the same period in 2009⁴
  
• Poverty - levels halved between 2004 and 2008⁵
  
• Employment - there are more jobs on offer with the goverment creating 213,000 jobs in June 2010 alone⁶
  
• Tax breaks - these have encouraged Brazilian consumers to spend money, although they are coming to an end.
  

The crystal (beach) ball

Brazil has a lot to look forward to.  The country will host the football World Cup in 2014 and the Summer Olympics two years later, in 2016.

Previous host countries have experienced significant benefits from these events, revitalised by the influx of tourists, the attention of the worldwide media and sponsorship revenues from large companies.

However, it needs to be done right. Hopefully, Brazil will be able to capitalise on this opportunity.

October this year will be an exciting month for the country. Brazil’s presidential elections are scheduled for the 3rd and could well bring instability to the region. No doubt the new government will be under pressure to maintain the country’s recent economic success. The main challenge will be sustaining Brazil’s impressive growth spurt whilst keeping a tight lid on inflation.

How do i join the carnival?

The road to Rio is well trodden. Investors can feel comforted that Brazil has now been rated as investment grade by three of the leading ratings agencies: Standard & Poor’s, Fitch and Moody’s. Regardless of your investment approach, there are many routes to invest in Brazil.

• Your full attention – an Exchange Traded Fund focussed on the country will give you access to a diverse array of Brazilian companies and exposure to the country’s economic growth. One investment option to consider is the iShares MSCI Brazil (IBZL), which has been a popular choice with our clients so far this year.
  
• an ETF that aims to track the MSCI Brazil Index, which is linked to around 75 Brazilian equities
  
• See the Top 10 ETF purchases by Barclays Stockbrokers clients over the last week.
  
• Hands off – a managed fund allows you to capitalise on a fund manager’s expertise. There are funds that not only invest in the emerging markets, but that have a Brazilian focus. The Aberdeen Emerging Markets fund was 17.3% Brazil-invested at the end of June. Even better, the fund is eligible to go in your ISA.
  
• Search the ‘Global Emerging Markets’ or ‘Specialist’ sectors on our Funds Research Centre for other managed funds that invest in Brazil
  
• See the Top 20 funds purchased by Barclays Stockbrokers clients during the last calendar month.
  
• Straight up – the JP Morgan Brazil Investment Trust (JPB) is listed on the London Stock Exchange and is devoted to Brazil. It looks to invest in small and medium-sized Brazilian companies that are well placed to benefit from the success of recent years.
  
  

Health warning – always wear sun cream…..

A fairy tale like this does not come without its very own wicked stepmother. Brazil’s economy is under threat, namely from inflation and economic uncertainty in other countries.

Key concerns:

• Is the party over? Growth appears to be slowing as the Government winds down its stimulus programme. The finance minister has predicted that the rate of growth will cool this year.
  
• Turning up the heat – inflation is a real worry for any country experiencing rapid growth. Although inflation recently went above government targets, it is now back on a downward curve. The central bank announcement in September will be key. Policy makers must tread carefully to ensure the economy does not overheat. Read the latest edition of Barclays Wealth’s SignPost for more information.
  
• Double dip – a double dip global recession could have serious ramifications for Brazil.  Combine the European debt crisis with sluggish US growth and exports could be in trouble. Brazil exports a large number of commodities to the rest of the world, leaving it vulnerable to a slow-down in other countries.

 

You should bear in mind that:

• Emerging markets can be more volatile than developed equity markets
  
• Investing in emerging markets can expose you to currency risk
  
• Investing in emerging markets may not be for everyone, the value of your investments can fall as well as rise and you may receive back less than you invested.

Barclays Stockbrokers does not give advice. If you are in any doubt as to the suitability for you of investing in emerging markets such as Brazil, or in ETFs or managed funds, please seek financial advice.

 

 

¹SignPost, Barclays Wealth, July 2010
²FT.com, ‘Good fortune helps strengthen Brazil’s economy’, 28 June 2010
³Goldman Sachs BRICs Monthly, Issue 10/03
⁴BBC 8 June 2010
⁵FT.com, ‘Good fortune helps strengthen Brazil’s economy’, 28 June 2010
⁶Bloomberg 21 July

 

20 July 2010 - Global Reach – Consider Korea?

We are now well into the summer months of 2010, a time when many investors reflect on their portfolios. Is your investment strategy working or is it time to make some changes? It could be the perfect opportunity to shape up your investments for the second half of the year.

When you are reviewing your portfolio, you might want to consider one of the key investment themes highlighted in recent times - the need for global diversification.  It has also never been as easier.

Over the coming weeks we will be examining how you can achieve global reach in your portfolio. Our first spotlight falls on an Asian market that is often overlooked – Korea.  In many respects, Korea has historically been overshadowed by its more familiar neighbours, China and Japan. The two Asian heavyweights tend to hog the limelight, but from an investment perspective, Korea is worth considering.

Compass points to Korea

The July edition of Compass (Barclays Wealth’s investment strategy report) has a focus on Korean equities and highlights several reasons to invest in Korea. These include:

                  

• Valuations – Korean equities currently appear to be undervalued

• Economic prospects – low unemployment levels and strong growth data      

• Export strength –  a key part of the Korean economy likely to benefit from continued global recovery and increasing consumption by wider Asian markets

There is also the prospect of Korea possibly being upgraded from an emerging market to a developed market, a re-classification currently being considered by MSCI, one of the leading providers of global market indices. This reclassification would improve Korea’s prospects as an investment destination further still. To find out more, login to your account to view the latest edition of Compass.

Investment Options

If you like the idea of investing in an emerging market, such as Korea, and creating a globally diversified portfolio, there are a number of ways you can achieve this. Perhaps the simplest way is to invest in an Exchange Traded Fund (ETF) focused on the Korean market.  Consider the iShares MSCI Korea – an ETF that aims to track the MSCI Korea index and provides diversified exposure to around 100 Korean equities. Bear in mind that the value of ETFs can fall as well as rise and you may get back less than you invested.

Alternatively, you could consider investing in a managed fund focused on the wider Pacific region. Funds from the “Asia-Pacific excluding Japan” sector will provide investment exposure to the Korean market. For example, Fidelity South East Asia is a managed fund that aims to provide capital growth by investing in equities throughout the Asian region, excluding Japan and has a 21.8% exposure to the Korean market. Although remember that the performance of funds is not guaranteed and you may get back less than you invested.

Global reach for your portfolio is now close at hand. If you think an investment in Korea is appealing and will add to your portfolio’s international diversification, reach out and grab it!

Barclays Stockbrokers does not give advice. If you are in any doubt as to the suitability for you of investing in emerging markets such as Korea, or in ETFs or managed funds, please seek financial advice.

 

26 March 2010 - China: The rise of the renminbi

Our ongoing series of Investment ViewPoints on emerging markets has so far covered the general story while taking a closer look at China, Brazil and more recently India.  We continue to explore the emerging markets theme in our next instalment of Investment ViewPoint: Analysis by re-visiting China’s growth story and discussing the impacts on the greater Asian economic region that China’s development may have.  Central to this analysis will be a focus on the Chinese renminbi (CNY) where widespread expectation of the currency being revalued continues. It is this appreciation and likely impact, not only on the surrounding regional economies such as Korea, Singapore, Taiwan and Indonesia but also the global economy that could offer some interesting trading opportunities for investors as the story unfolds.

• China - 2010 the year of the tiger
• Chinese economic foundations
• Renminbi appreciation
• Agriculture
• Metals and infrastructure
• Gold
• Be not afraid of growing slowly, be afraid only of standing still
• China - shaping up for succsess
  

China - 2010 the year of the tiger

Last year, China was the third largest economy in the world behind the United States and Japan, but following respective performances in 2009 China looks set to roar and become the second largest economy in the world and finally overtake the land of the rising sun. China’s economy expanded by 8.7% compared to Japan’s 4.6% in 2009 and with the two countries’ figures now so close it looks likely this will be China’s year to take its place as the world’s second largest economy. In 2009 industrial output from China's factories increased by 18% in the fourth quarter, and by 11% annualised as the worlds biggest exporter continued its steady rise up the global GDP rankings.

The scale and depth of China’s resources is quite staggering and now that the country is beginning to hone its economic and political capabilities, who would bet against them ultimately becoming the largest economy in the world, overtaking the United States?  While market commentators have mixed views on this subject, it appears unlikely to happen in the current decade. However, if global economic dominance was Britain’s in the 18th and 19th centuries and America’s in the 20th century, with its leading position in new technologies, cars and the internet then the 21st century could belong to China if it continues its meteoric development.

Chinese economic foundations

Before we explore some of the opportunities that may develop in 2010, it is important to take a broader perspective and understand the economic and political backdrop to modern day China. The last thirty years have seen dramatic change, which has provided the foundation for the current economic performance.  Thirty years ago China was very much a centrally planned economic system relatively closed to international trade. Over recent years it has developed into a market orientated economic system and now one of the worlds leading economic and political players. It has experienced a paradigm shift in the thinking not only of the government but its people, who are becoming accustomed to an improved standard of living. In contrast to our observations on India’s pursuit of wealth in January’s Investment ViewPoint Analysis, the Chinese public are generally more reserved when it comes to expanding their purchasing power.  However a swing in this mindset towards consumerism could act as the catalyst to making China a true economic superpower.  China’s economic engine runs on a number of factors but most important are its vast human and natural resources. It has a population of over 1.3 billion people and the largest working population in the world, approximately 813 million people.  By comparison, the UK has a total population of just 61.3 million people with 62% of the population of working age (16 to 64 for males and 16 to 59 for females).

As you can see from the charts below the demographics have changed dramatically over the last fifty years and look set to change significantly over the next fifty. In Figure 1, over 40% of the population in 1950 were children aged 0-19 vs just over 32% in 2000 and a projected 20% in 2050.  This can be attributed to China’s strict one-child family planning policy.  However, despite this declining trend in children being born the numbers remain thought provoking.  Looking more closely at the 0-19 age group in 2000 (32% of the population) that still amounts to approximately 416 million children entering the workplace in the next 20 years or almost 7 times the current total population of the UK. This will have a major demographic impact in future decades.  In the short term, over the next couple of decades, this segment of the country’s population will bring a significant amount of resource and differentiated skills to China’s economy and continue to fuel the production cycle. This short term impact clearly also has long term implications for China with an aging population, as demonstrated in Figure 3 with over 30% of the population in 2050 projected to be aged 60+ compared to less than 10% in Figure 2.  These demographic changes will impact different sectors at different times opening up potential investment opportunities.  For example it can be suggested there will be significant growth in the education, manufacturing, construction and retail sectors to support an expanding population moving out of the family home and into the working arena.   Additionally the health sector could benefit from continued growth in demand to meet the needs of the aging population in years to come.  This is likely to mean more research and innovation from pharmaceutical companies as they work to produce drugs capable of alleviating and curing ailments of such a populous country.

     

 

Taking a closer look at the composition of GDP, China derives approximately 10.9% from agriculture, 48.6% from industry and 40.5% from service industries.  This is very much in line with traditional modernised economies and perhaps demonstrates China’s movement towards a more western economic philosophy.  This is important as it acts as an indicator for change in demand for products and services from the Chinese consumer.  As more Chinese people increase their disposable income, and demand all types of products including traditional ‘western’ goods, so more opportunities exist for global companies to benefit. 

As both a major exporter and importer, China is taking more control over the supply and demand of trade flow around the world.  For example Japanese exports to China now account for 80 per cent of the growth in the Japanese economy.  China is also the largest foreign creditor to the US, buying billions of dollars worth of Treasury Bonds as the US raise capital for government spending.  Another significant influencing factor on US debt to China is the fact that the United States purchase far more goods from China than China does from the United States.  In fact it is suggested that demand in the US for Chinese goods outstrips Chinese demand for American goods by almost 500 per cent. It is these inter-linked economic dependencies that have caused the US to call for the Chinese to revalue the renminbi against the dollar – it has remained fixed at 6.8 to the US dollar since mid-2008. The main focus of this fixed exchange rate policy was to help China boost its exporting capability and remain relatively cheap in comparison to its competing trading partners. The downside to such a policy is imported goods then become more expensive for Chinese consumers. This leaves the Chinese government in a quandary, partly because of consideration to the Chinese people but also from pressure being applied by the US and competing nations.

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Renminbi appreciation

With expectations high that Chinese authorities will permit the renminbi (CNY) to appreciate in the near future, market analysts continue to monitor for any signs of when the revaluation will occur and its likely scale.  As this uncertainty continues and speculation increases, Barclays Wealth Research suggests that there are three fundamental reasons why the renminbi will appreciate this year:

1. Pressure from China’s trading partners for a stronger renminbi as Chinese exporters have had a “free ride” with the currency remaining pegged to a weakening dollar.
   

2. China’s economic policy, including its large fiscal stimulus package, was structured to encourage more domestic consumption and a stronger CNY would be consistent with this goal.
   

3. Higher food and energy prices are contributing to inflationary pressures in China which could make currency appreciation more attractive to policymakers, and would in turn reduce the local price of dollar-invoiced imports.

If the Chinese renminbi does indeed appreciate in value it could possibly have a significant positive knock-on effect on a number of economies particularly those who are large purchasers of raw materials and agricultural products from China and the rest of the world.  The following countries are now in focus for Barclays Wealth research teams:

• Indonesia (IDR)                            
• Taiwan (TWD)                                
• Singapore  (SGD)                           
• Korea  (KRW)                                 
• India  (INR)                               
• Thailand (THB)                          
• Malaysia  (MYR)                   

Agriculture

As disposable income increases, so we see dietary requirements changing, with Asian consumers now looking for more protein-based food and moving away from the traditional rice-based diet. While there remains a significant demand for soft commodities such as wheat, sugar and cocoa, these are heavily dependant on the weather and producing strong crops but the outlook remains positive for soft commodities.

As populations such as China’s continue to grow at a faster rate than the rest of the world it suggests demand will remain constant for basic foodstuffs to meet the needs of this growing regional and global population.  To cope with this, farming practices are becoming more sophisticated in emerging markets, in turn reducing costs and driving production efficiencies. It is this evolutionary cycle which will help fuel specific sectors and therefore benefit from the growth of China.

Metals and infrastructure

With a growing population comes increased demand for products such as cars, houses, buildings, machines, factories, offices and so on which in turn drives demand for industrial and precious metals.  So when you look at the top ten performing in 2009 it is perhaps not surprising that metals such as lead, copper and palladium all offered triple digit returns over the course of the year, fuelled in part by significant demand from China despite the global recession.  Of course this demand remains dependant on external factors including global manufacturing but as the rate of population growth continues it is easy to imagine this demand continuing.

Gold

Other important asset classes that hit the headlines in 2009 were global currencies and gold.  Interestingly Asia only holds approximately 2.4% of its total reserves in gold – however, China has recently increased its gold reserves to 1,054 tonnes.  It is important to note that if the renminbi is revalued, gold will become cheaper, relatively speaking, for Chinese investors as they would require fewer renminbi to buy a commodity that trades in US Dollars.  Investors can get access to currencies and gold through

 

Be not afraid of growing slowly, be afraid only of standing still - Chinese proverb

China certainly cannot be accused of standing still and with Michael Dicks, Head of Research at Barclays Wealth commenting that “Asia’s economies are likely to be the fastest growing in the world in 2010” and Anthony Bolton a leading figure in fund management suggesting China is in an “investment sweet spot”, it is easy to see why there is so much interest from investors looking to get exposure to growth in the region.

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China - shaping up for succsess

With Barclays Wealth Research holding a bullish view on the appreciation of CNY and the impact this could have on the surrounding economies and currencies, how can investors position their portfolio to benefit from any future growth in Asia and emerging markets in general? 

Depending on your appetite to risk there are a range of options available to you across the Stockbrokers suite of products that you could utilise to compliment your existing trading strategy.

In our previous emerging markets ViewPoints we discussed a selection of products that can provide various degrees of exposure to emerging markets and China in particular. There are also products that have a focus on the wider Asian region, such as an like the iShares MSCI AC Far East ex Japan. Alternatively investors could focus on tracking the performance of an individual Asian region outside of China using ETFs such as the iShares MSCI Korea or the iShares MSCI Taiwan. Looking specifically at the iShares MSCI Emerging Markets ETF, this has over 17% of its portfolio invested in China and also gives you exposure to other countries highlighted as potential beneficiaries of renminbi revaluation, including Korea, Taiwan, Malaysia, Indonesia and Thailand. Looking at managed funds, the Aberdeen Emerging Markets fund currently has just over 14% invested in Hong Kong and China with China Mobile Limited the top holding within the fund. If you are looking for even more concentration of China in your investments then you may like to consider the First State Greater China Growth Fund.

First State Greater China Growth Fund.

 

23 October 2009 - A taxing time for Brazil

This week, Brazil is the most talked about emerging market after an announcement on Monday 19 October 2009 that the government is introducing a 2% levy on currency inflows into Brazil from non-resident investors. After the announcement from the Brazilian Minister of Finance, the policy was made effective immediately on the 20 October.

 

The tax is effectively an attempt by Brazilian policy makers to curb the rapid appreciation of their currency, the Brazilian Real, which has strengthened against the dollar throughout 2009. Their view is that the strength of their currency is likely to impact on exports, a critical driver of the Brazilian economy and they are trying to exercise a control over this.

 

This is not the first time Brazil has employed such a policy. In 2008 a similar tax was applied to fixed income investments with the intention of halting currency appreciation. The measure had short term success with the Real depreciating across the two weeks following the policy’s implementation then resuming on its growth trend thereafter. The tax was removed as soon as the scale of the credit crisis became apparent.

 

This time, the policy is wider reaching, with the tax rate being 0.5% higher and applying to equities as well as fixed income investments. The initial reaction was a 4% drop in Brazilian market value but there is wider scepticism as to how long the policy will remain effective. Most analysts took the view that it may well deter shorter term investments but that it was unlikely to be sufficient to stifle the Real’s appreciation over a longer period.

 

From the perspective of a UK investor in Brazil the impacts are mixed. Existing investments are unaffected, although depending on their nature, they will obviously factor in any wider Brazilian market impacts that the policy triggers. The tax applies to the FX transactions related to new investments, as opposed to any investments themselves, so future investors may find the related transaction costs of products providing investment exposure to Brazil are likely to increase.

 

The question many investors may ask is “does this make Brazil more or less attractive as an investment opportunity?”. The natural reaction would be that a tax of any sort can only diminish appeal. However an alternative view would be that this policy intervention is actually an indication of value as an appreciating currency can be a clear indicator of growing economic strength.

To find out more about the dynamics of Brazil’s economy, the country’s future prospects and ways to get investment exposure, read our “Investment ViewPoint: Analysis – Brazil: time to smell the coffee?”.

 

Bear in mind that investing in emerging markets, either by region or by individual market, may not be suitable for everyone as they can be more volatile than developed equity markets. The value of emerging markets investments can fall as well as rise and you may receive back less than you invested.

 

25 September 2009 - Brazil: time to smell the coffee?

As part of the quartet comprising the BRIC nations, some might argue that Brazil has been overshadowed by China, India and Russia in terms of international economic focus in recent years. However investors could be wrong to ignore the country as a possible opportunity for portfolio diversification. Here we investigate the current economic health of the nation more famous for coffee, samba and football, and explore its future prospects.  Click here to read the full Investment ViewPoint: Analysis

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28 August 2009 - No immunity from uncertainty

Over the past few months, emerging markets, China in particular, have been seen as likely contenders to lead a global economic recovery and drive the return to growth. Indeed our own Investment ViewPoint: Analysis Emerging markets – ready for recovery? discussed this topic.

 

China has certainly set the pace for recovery with the Shanghai Composite index gaining over 80% from the start of the year through to the beginning of August. However, during August, Chinese equities have suffered a sharp sell-off and the index dropped 20% between 4th and 19th of the month. In fact August has been the most turbulent period for the index in months, recording its biggest one-day fall in the past 9 months and its largest daily gain since March, all in the space of 7 days. So, despite being a leading light towards economic recovery, China has proved no more resistant to market wobbles than many other equity markets.

 

The initial aspect of interest here is the triggers behind this volatility. Chinese stocks have slumped this month, with investor confidence eroded on the back of a decrease in new bank loans in July and concern that the government may seek to dampen property speculation. Further fears that monetary policy may be tightened contributed to the fall, despite assurances from the People’s Bank of China that it would retain a ‘loose’ monetary policy. Views are mixed on whether this recent activity represents the onset of a Chinese bear market or is more of a natural correction in the ongoing growth curve.

 

Of even more interest, is the attitude of the rest of the world. In some camps, China is now being viewed as a significant driver of global economic health, with a closer correlation expected between Chinese and developed market performances. As such, some analysts are suggesting that in the future, they will increasingly look to China as a barometer when forecasting broader market outlooks. However the alternative view is that many of the fundamentals of the Chinese economy do not actually lend themselves to being drivers of global market performance and that any correlation is going to be largely based on sentiment rather than hard economics.

 

Regardless of this debate, the key lesson of the past few weeks is that China, as with all emerging markets, is susceptible to volatility and analysts and investors alike need to factor this into their thinking. Investors in particular should consider volatility when deciding on an emerging markets allocation within a globally diversified portfolio - smaller percentage allocations may be more prudent for some.

 

If emerging markets, or China in particular, have investment appeal, find out about the various ways you can get exposure to them through our Investment ViewPoint: Analysis Emerging markets – ready for recovery? Given recent volatility a structured product with a focus on China that offers an element of capital repayment, such as Barclays China and Agriculture Investment Note may be of particular interest. However bear in mind that structured products are not suitable for everyone; when investing in these products you should be aware that you may receive back less than you invested. If you are unsure about the suitability of structured products for you, you should seek independent advice.

 

And remember that you can keep track of all the market news and movements through Barclays Stockbrokers Research Centre.

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03 July 2009 - Emerging markets: ready for recovery?

In the days of the pre-credit crisis bull market, products that focused on emerging markets were some of the most talked-about asset classes around. With strong economic growth prospects offering investors the potential of good returns, many an opportunistic investor’s eye turned to South American metals, Indian spices and all the tea in China.  Click here to read the full Investment ViewPoint: Analysis

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