outlook – march 2006 · outlook – march 2006. westam woolgate exchange 25 basinghall street...

Global Emerging Markets

Outlook – March 2006

WestAM

Woolgate Exchange

25 Basinghall Street

London EC2V 5HA

March 2006

Emerging Markets, London

Page 1

Market Performance

from 31.12.1998 to 31.01.2006

60

110

160

210

260

310

360D

ec-

98

Jun

-99

Dec-

99

Jun

-00

Dec-

00

Jun

-01

Dec-

01

Jun

-02

Dec-

02

Jun

-03

Dec-

03

Jun

-04

Dec-

04

Jun

-05

Dec-

05

MSCI World MSCI EM S&P500

Emerging markets continue to outperform their developed counterparts

Source: Datastream, February 2006

WestAM

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London EC2V 5HA

March 2006


Page 2

Global Growth Remains

Supportive for Emerging Markets

WestAM

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London EC2V 5HA

March 2006


Page 3

Relative Performance of MSCI EM/World and OECD G7 Lead

Indicator (year-on-year % change)

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

OECD G7 LI yoy % chg (LHS) MSCI EM / MSCI World Free yoy % chg (RHS)

Relative performance linked to economic activity


WestAM

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March 2006


Page 4

World GDP Growth

2007

Consensus % Consensus % Consensus %

World 3.3 3.3 3.2

US 3.6 3.4 3.1

Japan 2.5 2.2 2.1

EU 1.6 2.1 2.0

Latin America 4.2 4.0 4.1

North East Asia 7.1 6.9 6.8

South East Asia 4.8 5.4 5.3

Eastern Europe 5.3 5.3 5.3

2005 2006

Emerging markets offer premium growth

Source: Consensus Economics – January 2006

WestAM

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March 2006


Page 5

Emerging Market Valuations

Remain Attractive

WestAM

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London EC2V 5HA

March 2006


Page 6

Forward Price Earnings

6

8

10

12

14

16

18

20

22

Dec-

94

Dec-

95

Dec-

96

Dec-

97

Dec-

98

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Dec-

05

EM US WORLD

P/E 11.3 15.3 14.9

EPS 17% 12% 12%

PE/G 0.7 1.2 1.2

2006

As at February 2006, IBES - 12 month forward

Forward P/E at low historic levels


WestAM

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March 2006


Page 7

Price Earnings Discount to MSCI World

MSCI EM 12month Forward P/E Relative to MSCI World

-60%

-40%

-20%

0%

20%

40%

60%D

ec-

88

Dec-

89

Dec-

90

Dec-

91

Dec-

92

Dec-

93

Dec-

94

Dec-

95

Dec-

96

Dec-

97

Dec-

98

Dec-

99

Dec-

00

Dec-

01

Dec-

02

Dec-

03

Dec-

04

Dec-

05

Dis

cou

nt

/ P

rem

ium

to W

orl

d

Emerging markets still at a discount to developed markets

Source: Datastream, IBES, February 2006

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March 2006


Page 8

Liquidity Still Supportive

WestAM

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London EC2V 5HA

March 2006


Page 9

Inflows Support Emerging Markets

US Mutual Fund flows into Emerging Markets

-30000

-20000

-10000

0

10000

20000

30000

40000Ja

n-9

0

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Cumulative 12 month flow to GEM Bonds (RHS) Cumulative 12 month flow to GEM Equities (RHS)

MSCI ACWI ex US has 12.6% in EM. MSCI ACWI free has 6.4%

Anecdotal evidence suggests US investors in particular are underweight emerging markets

Source: UBS, January 2006

WestAM

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London EC2V 5HA

March 2006


Page 10

WestAM’s

Regional Outlook

WestAM

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March 2006


Page 11

Asia

China

Growth remains strong. Currency revaluation to continue

Korea

Stock market good value, export sector strong, domestic economy recovering

India

Excellent medium term outlook, current valuations expensive, reforms unlikely

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March 2006


Page 12

Russia

Economy strong, political concerns abating, oil price supportive

CE3

Convergence theme liquidity, market performance affecting valuations

Turkey

Economic environment improved, accession process commenced, reflected in prices

South Africa

Currency overvalued, but strong domestic economy

EMEA

WestAM

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London EC2V 5HA

March 2006


Page 13

Brazil

Economy remains stable, exports strong but electoral uncertainty, currency overvalued

Mexico

Reforms stalled during Presidential election campaign

Argentina

Growth continues, inflation becoming a concern, populist economic policy

Chile

Solid domestic economy, but market expensive

Latam

WestAM

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March 2006


Page 14

Risks

Treasury yields and Fed Funds rates

Impact of high oil prices on G7 growth and inflation

Profit taking and increase in risk aversion

Geo-politics

WestAM

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London EC2V 5HA

March 2006


Page 15

Summary

The global economic growth outlook remains generally positive in 2006

Interest rates have risen in 2005. Further measured increases are discounted in the markets

Earnings growth continues to support equities.

Emerging Market valuations remain very attractive both relative to their own history, on a prospective P/E of

10x , and versus developed markets.

Liquidity remains high but this could be squeezed short term as interest rates rise or profits are taken

WestAM

Woolgate Exchange


London EC2V 5HA

March 2006


Page 16

Awarded Standard & Poor’sPerformance - Micropal (to December 2005)

Period 1yr 2yr 3yr 4yr 5yr

Return** 36.7 30.1 40.1 27.8 22.9

Percentile 23 31 22 21 14

Risk Adjusted Rank 51/415 91/391 35/372 18/341 3/310

Percentile 13 24 10 6 1

**Annualised Return%

Prizes*

S&P European winner over 3 years

S&P European winner over 5 years

S&P (Switzerland) winner over 5 years

S&P (Germany) second over 5 years

S&P (Italy) winner over 5 years*to end of March 2005

Source: S&P Micropal – December 2005

WestAM

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March 2006


Page 17

Emerging Market Equities - Competitor Analysis

Rel. Return/Rel. Risk vs. MSCI EM Index* (since Inception: 01.01.99)

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

9.0%

2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

Rela

tive R

etu

rn(in %

p.a

.)

Tracking Error (in % p.a.)

Genesis(0.52)

WestAM Comp.Global Emg Mkt

(1.14)JPMorgan

(0.73)

Templeton(0.47)

Schroder(-0.33)

Merrill Lynch(-0.21)

Fidelity(0.53)

Alliance Capital(0.47)

Pictet(0.32)

Frank Russell(0.47)

ABN AMRO(0.65)

ING(-0.32)

Capital Int.(0.37)

Date: December 2005

Source: WestAM

Data Source: Standard & Poors - Micropal Work Station * WestAM used S&P IFCI Index up to 31/12/02. Returns above all relative to MSCI EM

WestAM

Woolgate Exchange


London EC2V 5HA

March 2006


Page 18

Global Emerging Markets Strategy

MSCI EM Target Target

06-Feb-06 09-Jan-06 08-Feb-06 Comments

Asia:

Korea 17.6 21.9 21.0 Domestic recovery in place. Liquidity and valuations and d supportive.

China 8.0 11.1 11.4 Attractive valuations. Domestic economy remains strong. Currency appreciation expected.

Taiwan 13.9 16.6 17.0 Attractive valuations and improving earnings growth. Domestic economy supportive.

Thailand 1.8 4.8 4.9 Attractive valuations and earnings growth. Domestic economy improving.

Malaysia 2.8 2.8 2.8 Reasonable valuations. Oil price supportive. Fiscal and growth concerns.

Philippines 0.4 0.5 0.4 Attractive valuations, reasonable economic fundamentals. Uninspiring growth.

Indonesia 1.5 1.4 1.5 Reasonable valuations. Continuing inflation and interest rate concerns.

India 5.8 0.9 1.8 Expensive valuations fully reflect strong earnings growth. Selective bottom-up opportunities.

Pakistan 0.2 0.0 0.0

Total: 52.0 60.0 60.8

Latin America:

Peru 0.5 1.5 1.5 Commodity prices remain supportive but election uncertainty continues.

Argentina 0.6 0.6 2.1 Strong economic growth but inflation and policy concerns. Economic policy uncertainty. Oil price supportive.

Brazil 11.2 10.5 11.2 Reasonable valuations and declining interest rates. Expensive currency.

Chile 1.6 0.0 0.0 Strong economic fundamentals but expensive valuations. Interest rates rising.

Mexico 6.1 1.3 1.1 Unexciting valuations and earnings growth. Election concerns.

Colombia 0.4 0.0 0.0

Venezuela 0.1 0.0 0.0

Total: 20.5 13.9 15.9

EMEA:

Russia 5.7 8.6 5.7 Valuations no longer supportive following prolonged outperformance. Take profits.

Israel 3.2 3.2 3.2 Stable economic environment. Reasonable earnings growth but interest rates rising. Overriding political uncertainty.

Egypt 0.9 0.8 0.9 Expensive valuations offset earnings growth. Privatisation process accelerating. Liquidity remains supportive.

Hungary 1.2 1.3 1.2 Reasonable valuations but continuing fiscal and currency concerns.

Turkey 2.3 2.3 2.3 Good economic growth and earnings outlook. EU convergence process continues.

Czech Rep 0.9 0.9 0.0 Reasonable economic fundamentals but expensive valuations offset strong earnings growth.

Poland 1.6 0.0 0.0 Unattractive valuations, poor earnings growth. Short term political concerns

South Africa 11.2 8.7 9.4 Uninspiring valuations and current account concerns. Currency risk remains. Commodity prices supportive.

Jordan 0.2 0.0 0.0

Morocco 0.3 0.0 0.0

Total: 27.5 25.8 22.7

Liquidity: 0.0 0.3 0.6

Grand Total: 100.0 100.0 100.0

Source: WestAM

This document has been prepared by WestAM, which is the marketing name for the asset management activities of WestLB Asset Management, a business unit of WestLB AG or one of its affiliates, including but not limited to

WestLB Asset Management (UK) Limited, WestLB Asset Management Kapitalanlagegesellschaft mbH, JAIC WestLB Asset Management Co., Ltd, WestLB Asset Management (Australia) Pty. Limited, WestLB Asset Management

(US) LLC, WestLB Asset Management (USA) LLC, or Banque d’Orsay SA.

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Although the information in this document is derived from public sources we believe to be reliable, we do not represent, warrant or guarantee that this information is accurate, complete or suitable for any purpose and it should not

be used as a basis for investment decisions. All opinions and estimates herein, including forecast returns, involve a number of assumptions that may not prove valid. Further, investment in global markets can be affected by a

host of factors, including political or social conditions, diplomatic relations, limitations or removal of funds or assets or imposition of (or change in) exchange control or tax regulations in such markets. Any opinions or estimates

expressed in this document reflect our judgement as of the date of its publication and are subject to change without notice. Additionally, investments denominated in an alternative currency will be subject to changes in exchange

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outlook – march 2006 · outlook – march 2006. westam woolgate exchange 25 basinghall street...

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