Emerging Markets Are No Longer Only About Commodities

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Global investors used to consider emerging market as mainly commodity plays. Unlike developed markets other sectors such as banking, healthcare, IT, consumer staples, telecom, airlines, etc. did not get much attention from most investors. But today’s emerging countries are much more than just commodities, For instance, the Chilean economy is not confined to just copper, the Russian economy is more than just oil and gas, China is turning into a consumption-based economy, Mexico is a manufacturing leader than only an oil producer, etc. So investors looking to add exposure to emerging markets should cast their net wide and consider these markets for all types of sectors than only commodities.

From an interesting article on Emerging Markets by Merryn Somerset Webb at MoneyWeek:

In Latin America, Chile, Peru, Columbia and Brazil are making the right noises, while in Asia there are standouts such as Vietnam and Indonesia. For now, at least, says a note from Eurasia Group, there is a “positive inflection point in emerging market political stability”. But the convergence – and hence the argument for the disappearance of the emerging-market discount isn’t just about politics (obviously). It is also about structural shifts in the economic make-up of various countries.

Thirty years ago, emerging markets were all about commodities and cyclical investments. No more. According to Ashmore Investment Management, some 50% of the MSCI Emerging Market index is now made up of “structural growth drivers” such as telecoms, technology, consumer and healthcare companies. Overall, the tech share of emerging markets is higher than that of the S&P 500 (23% vs 21%). The commodity component has fallen to a mere 14% – less than half of what it was a decade ago.

The equity universe in emerging markets is broader, deeper and hence much safer than investors think. That makes it too cheap. Structural growth companies “have superior earnings visibility for multiple years compared to cyclical ones”, says Ashmore, so investors should be paying up for them. One day they will. They might also soon be willing to pay up for income – the one thing you all tell me over and over again that you want more of.

Big companies in the West are close to the end of the dividend road: in the UK, ten FTSE 100 stocks account for 55% of the income – and their payout ratios are far too high for comfort. Across emerging markets, things are different. According to Invesco Perpetual, there is a much higher degree of “dividend diversification” in the market (95% of firms in the MSCI Asia Pacific ex Japan index pay out something) and with good earnings growth, robust cash flow, healthy balance sheets and payout ratios that are currently low, the most obvious direction for dividend payouts is up.

Source: Buy into emerging markets as they turn into developed markets, MoneyWeek

Some of the emerging market equities that investors can research further include: Empresa Nacional de Electricidad SA (EOC), Ultrapar Participacoes SA (UGP), HDFC Bank Ltd (HDB), PetroChina Co Ltd (PTR), Standard Bank Group (SGBLY), etc.

Disclosure: No Positiosn

An Example of Why Investing in Commodities is Highly Risky

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Commodity investing have gone mainstream these days with investors bombarded with marketing materials promoting them as an alternative investment sector. However investing in commodities like copper, soya bean, orange juice, iron ore, etc. is not a wise strategy for most retail investors. Unlike stocks, commodities are highly volatile and it is very easy to lose money quickly. This is especially true with investing in futures where gains or losses can be exponential.

Most retail investors are better off avoiding commodities at all costs.

As an agricultural commodity wheat is traded widely and prices tend to fluctuate based on supply and demand for the most part. Before the Global Financial Csisi(GFC) wheat peaked at $14 per bushel. Since then prices have plunged by more than 70% and currently a the price of a bushel is below $4.

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Wheat Prices Chart

Source: Chart of the week: wheat mountain weighs on prices, MoneyWeek

The above example illustrates how much the price of a commodity can decline with almost no end in sight.

On the Composition of Assets of German Households

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In most developed countries interest rates offered by banks on savings accounts these days are pretty much next to nothing. Germany is no exception. Not only is the interest rate zero some German banks have started charging depositors with high cash balances in their accounts. Most savers around the world including Germans would agree paying a bank to save money defines logic and does not make sense.

Germans are big savers and not big spenders like Americans for example. Germany’s export-based economy as opposed to a consumption-driven economy is proof of this. Traditionally Germans save most of their savings in banks, life insurance policies, etc and not invest in stocks. I have written a few articles before on Germans’ low participation in the stock market and savings which you can find here, here, here and here.

Unlike Americans and others Germans are not big believers in the convenience of credit cards. Most prefer cash to cards. Hence stock ownership and credit card penetration rates are low in Germany.

A recent journal article discussed that more and more Germans are stashing their cash at home in safes and negative interest rates has turned the world of savers upside down.

The Composition of Assets of German Households from the article:

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German Households-Composition of Assets

 

Here is an excerpt from the piece:

In a country where few people buy stocks, the possibility of having to pay fees on deposits has turned savers’ world—and their piggy banks—upside down.

“The moment the bank tells me I have to pay interest on my deposit I’ll take my €50,000 or whatever it is and put it under my pillow, or buy a safe and stick the money inside,” saidDagmar Metzger, a 53-year-old entrepreneur in Munich.

Ms. Metzger, a game hunter, said she would also consider squirreling cash away in her gun cabinet, which has solid locks.

Paying to save is “preposterous,” said Marlene Marek, 58, owner of a Frankfurt bistro. “I would rather withdraw my money and stash it at home, or keep it in a safe-deposit box at a bank.”

Many Germans have a similar idea, creating waiting lists for safe-deposit boxes in some big cities. So a growing number of Germans prefer self-sufficiency.

“When you put money in a safe-deposit box, everyone notices, and you’re paying fees,” said Mr. Wiese, the Hamburg retiree, who said his new safe is roughly twice the size of a hotel safe.

Source: German Savers Lose Faith in Banks, Stash Cash at Home, WSJ, Sept 2, 2016

Infographic: Health Benefits Of Pulses

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Pulses offer many health benefits as they contain Vitamin-B and are rich in complex carbohydrates, proteins and micronutrients. Pulses can be used as part of healthy diet to fight malnutrition and obesity. Pulses include beans, chick peas, etc. and are consumed less in developed countries. Earlier this year I posted a note discussing some facts about pulses

The infographic below shows some of the health benefits of pulses:

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FAO-Infographic-IYP2016-3-Health Benefits of Pulses-high-res-en

Source: FAO

Earlier: Infographic: 10 Fascinating Facts About Pulses (TFS)