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II December 2013
GEM Equity Strategy Outlook 2014
Table Of Contents
Summary
Negative year in prospect but relative underperformance should slow
Valuations & Margins
Why emerging equities are not as cheap as they appear to be in aggregate... 13
Taper versus governance
BRICs at most risk of 'classic' EM crisis based on dysfunctional relationship
between state and companies
Still bearish on China
Positive sentiment overdone given risks of debt trap in corporate sector and
local government
Country conclusions
ASIA EX-JAPAN
China - corporate sector risks are rising
Korea - not as good as overseas investors believe
Taiwan - defensive merits no longer unappreciated
India - range bound until post-election outlook clearer
Indonesia - first stress test since 1997; equities expensive
Malaysia - low-beta but fundamentally without merit
Thailand - tempting only to a tactical contrarian
Philippines - superior fundamentals more than priced in
LATIN AMERICA
Brazil - cheap but fundamentals continue to deteriorate
Mexico - expensive but still better than the alternatives
Chile - continued breakdown of the neo-liberal model
CEEMEA
South Africa - cheap currency but expensive equities
Russia - cheap but fundamentals remain very negative
Turkey - risk reward has improved at current levels
Poland - still defensive in GEM context
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December 2013
GEM Equity Strategy Outlook 2014
Summary
Negative year in prospect but relative underperformance
should slow
GEM equities set to underpelform in 2013 by even more titan we had
anticipated
We intend to review the absolute and relative performance for GEM equities
during 2013 in more detail alongside the outcome of our own forecasts later in
this document, but with only a few weeks to go, it is very likely that EM will
have underperformed DM and in particular the US, by even more than our
forecast of 20-25%. The most noteworthy feature of 2013 has been the very
sharp decoupling of EM from US equities which has been even more
pronounced than during 2008-09 (Figure 11. Whilst discussion of EM markets
has been dominated by the potential impact of Fed tapering, we would
attribute this sudden shift in the relationship to the structural factors, which we
first identified in our initiation of GEM strategy coverage almost exactly three
years ago (Strucwral challenges drive performance, I December 2010). Whilst
we would very much like to become more optimistic about the prospects for
2014, we anticipate another year of negative absolute returns, albeit with
higher levels of dispersion and volatility, along with further underpeformance
against DM although by a smaller margin than 2013.
Figure 1: 1-year, 3-year and 5-year rolling correlation between MSCI EM and
MSCI US
1.2
Sara.. Owsiont Bait EVOYNS619 LP
EM relative valuations are not as cheap as they appear at face value
EM equities have been cheap relative to their DM peers on both earnings and
asset-based valuations for some time. The value case for overweighting EM
appears almost overwhelming now when the asset class is viewed in
aggregate against DM, but is somewhat less compelling when the country and
sector constituents are examined in a more granular fashion for the following
reasons.
Deutsche Bank AG/London
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II December 2013
GEM Equity Strategy Outlook 2014
•
Much of the relative value resides in the financial sector, where EM
price-to-book valuations appear very low relative to ROE both in
absolute terms and relative to their historical relationship. We believe
that this shift is due mainly to a very high level of investor scepticism
about the level of potential NPLs in the BRIC markets in particular,