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Emerging Markets Outlook
September 2017
Disclosures
2
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associated with an investment in a fund. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.
MSCI Emerging Markets (MSCI EM) Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of 24 emerging markets countries. The
MSCI Emerging Markets Investable Market Index (IMI) is a free float adjusted market capitalization index that is designed to capture large-, mid- and small-cap representation across 24
emerging markets countries. The MSCI China Index captures large and mid cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With
150 constituents, the index covers about 85% of this China equity universe. U.S. Open-Ended Diversified Emerging Markets Morningstar Category consists of emerging markets funds that
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S&P 500® Index (SPX) consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial and transportation).
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Growth Driving EM:
Headwinds Abate
3
Global Fears: The U.S. dollar fully valued?
The U.S. dollar has strengthened 39% since 2011; in
prior periods of dollar strength (most of the early 1980s
and in 1997-1998), emerging markets were in crisis, but
not this time around
Source BAML; HSBC. Data as of June 2017 (low chart) and March 2017 (upper chart).
See disclosures on page 2.
4
Global Fears: EM equity performance during U.S. rate hike cycles
Emerging markets equity have historically reacted favorably during U.S. rate hike cycles
Source VanEck, Bloomberg.
See disclosures on page 2.
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
400
420
440
460
480
500
520540
560
580
600
EM vs. Rate Hike - Feb 1994 - Feb 1995
MSCI EM Index (LHS)
Fed Funds Target Rate (RHS)
4.50
5.00
5.50
6.00
6.50
7.00
380
400
420
440
460
480
500
520
EM vs. Rate Hike Cycle - June 1999 - May 2000
MSCI EM Index (LHS)
Fed Funds Target Rate (RHS)
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
300
400
500
600
700
800
900
EM vs. Rate Hike Cycle - June 2004 - June 2006
MSCI EM Index (LHS)
Fed Funds Target Rate (RHS)0.25
0.35
0.45
0.55
0.65
0.75
0.85
0.95
1.05
700
750
800
850
900
950
1000
1050
11
/1/2
015
12
/1/2
015
1/1
/20
16
2/1
/20
16
3/1
/20
16
4/1
/20
16
5/1
/20
16
6/1
/20
16
7/1
/20
16
8/1
/20
16
9/1
/20
16
10
/1/2
016
11
/1/2
016
12
/1/2
016
1/1
/20
17
2/1
/20
17
3/1
/20
17
4/1
/20
17
5/1
/20
17
EM vs. Rate Hike Cycle - December 2015 - May 2017
MSCI EM Index (LHS)
Fed Funds Target Rate (RHS)
5
Global Fears: Populism and protectionism on the rise
State aid is a key mechanism for trade discrimination
Includes local procurement legislation, tax benefits for
export and domestic industry subsidization, heightened
regulatory standards, and public procurement discrimination
Over the long haul, technology is a much bigger driver of
trade than government policy
Zero sum game – China steps into the vacuum
Global Income Distribution
Source: Branko Milanovic (top chart). Merrill Lynch (bottom chart). Data as of December 31, 2016.
See disclosures on page 2.
6
EM Macro: Emerging markets have less financial vulnerabilities
Source: UBS (left chart) and Merrill Lynch (right chart). Right: Chart Data as of June of 2017.
See disclosures on page 2.
Financial Vulnerability in EMNumber of EM countries by exchange agreements
Most emerging economies (with the exception of China) have floating currency exchange systems
Currency flexibility is a natural progression from mercantilism and gives central banks more control over monetary policy
Emerging economies are less vulnerable today due to major economic and financial reforms in the past decade
External and fiscal accounts have significantly improved from the “taper tantrum” period
7
EM Micro: EM companies’ earnings are exceeding expectations
Often wrong, but never in doubt; 2017 a rare
example of analyst EPS growth optimism coming
true? BAML research suggests yes.
EM 12m forward earnings estimates revisions
accelerate
Source: BAML, HSBC. Data as of March 2017.
See disclosures on page 2.
Revisions to 12m forward earnings estimates in EM
MSCI Emerging Markets earnings growth estimates (%)
8
EM Micro: Capex declining and free cash flow galore
Source: CLSA. Data as of December 2016.
See disclosures on page 2.
14 16 20 22 28 44 53 48 52 54 5376
126165
186236
277
346361403
455451
506
562599
649611
678
752
0
100
200
300
400
500
600
700
800
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Forecast
13 18 24 27 3265
81 8550 41 55 63 78
102130
177212
256
354
314
369
444468
488482452
454445
413
0
100
200
300
400
500
600
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Forecast
1
-2 -4 -5 -4-21 -28 -36
2 12
-2
13
4863 56 59 65
90
7
89 86
7
38
72
117
196
157
233
339
-100
-50
0
50
100
150
200
250
300
350
400
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
Forecast
BAML predictions – all time high free cash flow in Asia ex-Japan
Asia ex-Japan operating cash flow (US$ bn) Asia ex-Japan capital expenditure (US$ bn)
Asia ex-Japan free cash flow (US$ bn)
9
EM Micro: EM selling at a 90% discount compared to the U.S.
90.50%
-20.00%
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
PB - Relative Value (SPX vs. MSCI EM)
SPX vs. EM -1 STD +1 STD Average
Source: Bloomberg, MSCI. Data as of June 2017.
See disclosures on page 2.
10
Structural growth versus cyclical growth
Source: VanEck. Data as of December 31, 2014.
For illustrative purposes only. The information above is intended to demonstrate VanEck’s investment process and strategies, and the types of investment
opportunities VanEck may consider. Actual holdings will vary for each VanEck client.
$-
$20
$40
$60
$80
$100
$120
$140
$-
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Sh
are
Pri
ce
EB
ITD
A (
Mill
ion
s)
EBITDA
Price
$-
$10
$20
$30
$40
$50
$60
$70
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
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$18,000
Sh
are
Pri
ce
EB
ITD
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Mill
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s)
EBITDA
Price
Structural Growth Cyclical Growth
11
