Focal Point The Fifth Element Renaissance Capital Investment summary 12 June 2017
The Focal Point
No, we’re not referring to Quintessence, Boron, or the film by Luc Besson, or even the Daniel Salter album by Bounty Killer. The Fifth Element that we are adding to our top-down asset +44 (207) 005-7824 allocation model for emerging market (EM) equities is the interest rate cycle – [email protected] alongside GDP acceleration, credit acceleration, real effective exchange rate (REER) Charles Robertson currency valuation and scope for credit rating upgrades. Vikram Lopez shows that interest +44 (207) 005-7835 rate cuts tend to coincide with periods of EM country outperformance (for more on this, [email protected] see p. 77). Vikram Lopez +44 (207) 005-7974 EM equities are benefitting from global tailwinds which could continue through [email protected] year-end – although following MSCI EM’s 17% US dollar return over the first five months Yvonne Mhango of the year, and with several global lead indicators having rolled over (albeit from strong +27 (11) 750-1488 levels), we would expect the pace of returns to slow and to be interspersed with [email protected] occasional profit taking. The eight-year bull market in developed markets (DM) has been Oleg Kouzmin a pain trade for a sceptical investor base, and we see EM’s 18-month old bull market as +7 (495)258-7770 x4506 having similar characteristics. [email protected]
Despite strong performance YtD, EM equities have yet to fully close their US Research analysts election-related underperformance vs DM. Fears of overt protectionism, so-called ‘Trumpflation’ (and the associated strong dollar, higher bond yields and rapid Fed hikes) have subsided. With US stocks appearing priced for perfection (on 18x 12M FWD P/E vs a 10-year average of 14x) the upwards pull on EM valuations (with EM on 12x vs a 10- year average of 11x) is there, but so is a potential external correction source. Frontier is cheaper still (on 11x) but is failing to attract the ETF flows that have buoyed EM (which has 30x better liquidity). Meanwhile, the EMBI global debt spread of 322 points has tightened significantly from November’s 407 peak, but is still not as tight as the 240-point post global financial crisis (GFC) low. And EM’s 12.3x 12M FWD P/E multiple has yet to breach the post-2010 high of 12.8x (in April 2015). Consensus now expects the strongest EPS growth in EM since 2010, of 28%.
The IMF’s recently published World Economic Outlook points to 2017 being the second year of relative economic acceleration for EMs vs DMs, a trend which the IMF believes is likely to continue for several years to come. Global growth in 2017 is also likely to be much more synchronised with all of the world’s top 40 economies expected to grow this year, for the first time since 2007. World trade growth is currently 1.4% YoY (on a three- month moving average basis) and though off recent highs appears to have broken out of its sluggish 0.5% rate of 2011-2016. The global manufacturing PMI of 52.6 for May is well into expansion territory and EM current account deficits have been reduced significantly from 2012-2013 peaks, suggesting greater resilience to gradually tighter global monetary policy.
Meanwhile, the market’s re-assessment of the Trump administration’s ability to streamline passing legislation and willingness to engage in damaging trade wars has put an end to the dollar rally, put a lid on US inflation expectations and with it US bond yields, helping global markets (so far) to rally. Futures suggest just one-to-two further Fed hikes by year-end, while ECB President Mario Draghi is “firmly convinced that an extraordinary amount of monetary policy support is still necessary” (and Brexit argues for a focus on growth by EU policymakers). The IMF’s expected global growth of 3.5-3.7% in 2017-2019, includes a gradual acceleration, but not to the kind of pace which would suggest the kind of commodity/inflation spike that we saw in 2007-2008 as the world “ran out” of oil and other commodities after annual average growth exceeded 5% pa over 2004-2007. Energy and materials make up just 14% of MSCI EM (IT and telecoms are twice as important) but 24% of MSCI EMEA. EM can manage gradual Fed hikes: between 2004 and 2006 the Fed hiked rates from 1% to 5.25% in a period of major outperformance for EM equities. Range-bound oil is a positive for reform in energy exporters (and good for global inflation). And, although the US expansion is now much longer in duration than the average post 1945, cumulative real GDP growth in the current expansion is still below the average (17% vs 25%): the window is thus still open for EM,
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we believe, and we may yet be a year or so away from the next major US equity sell-off. Our work shows that it is when US CPI hits 3% (currently 2.2%) that we believe investors should prepare to take money off the table in EM.
After a long period of EM underperformance (as EM economies slowed relative to DM), portfolio flows are returning. According to the Institute of International Finance, cross-border flows in to EM bonds and equities exceeded $20bn for the third consecutive month in April (a record since 2014). EPFR data show that EM equity funds have seen inflows of $28bn in 2017 YtD, with EM debt funds receiving inflows of $33bn. But the recent inflow comes after $155bn of outflows from EM equity funds over 2013-2016, and to date, just $37bn has returned (less than one quarter of the outflow). Debt funds have seen 85% of their 2013-2016 outflows return, suggesting EM debt flows may be more mature.
In conclusion, the EM drivers are a combination of a cyclical upturn globally, with more synchronised global growth, and benign inflation giving central banks wiggle room; improved EM growth relative to DM, as well as an earnings pick-up and returning flows. To be sure, EMs are not without their challenges. Considering the BRICS, Brazil and Russia are still struggling with low growth, Brazil has fallen in to a new political crisis and hopes for an easing of sanctions on Russia have faded; South Africa’s lacklustre economy fell into its second recession in eight years in 1Q17, and political challenges remain unresolved; while China’s attempts to slow the housing market and tackle the shadow banking system risk slower growth and increased volatility. Meanwhile, Indian bank lending has now dropped to the slowest pace in 63 years. That said, both Brazil and Russia are exiting multi-year recessions, China is unlikely to want (and has the tools to prevent) growth being hit too much ahead of October’s 19th National Communist Party Congress, and South Africa’s political issues could yet see more market-friendly ANC leadership (or failing that, the 2019 polls could lead to change). The IMF expects India’s growth to exceed China’s for the third year running in 2017 (and to accelerate for the next five years).
We look for exposure to seven main themes in EMEA and FM:
. Economic recovery stories in 2017 and 2018: For 2017, that suggests to us Russia, Greece, Hungary, Qatar and Poland within EMEA. Argentina, Morocco, Nigeria (at least according to IMF data), Kazakhstan, Pakistan and Vietnam in Frontier. For 2018 though, the list changes somewhat, with UAE, Egypt, Turkey, South Africa and Greece leading the pack in EM, and Kuwait, Oman, Nigeria, Kazakhstan, Saudi Arabia and Kenya in Frontier.
. Cheap currencies: In EMEA, Egypt remains one of the cheapest currencies in our 20-year REER model (with Colombia and Mexico also looking cheap). South Africa (5% cheap), Greece (2.2%) and Turkey (3%) are just slightly cheap and some would argue ought to be cheap given political issues; while in Frontier, Tunisia and Kazakhstan have cheap currencies, as apparently does Argentina using official CPI data (though using an alternate CPI history may make it slightly expensive), with Serbia (8%) and Senegal (4%) on the cheap side of fair value. Morocco is close to fair value.
. Potential upgrade stories: We see the Czech Republic and Greece, as potential credit upgrade stories in 2017, with Egypt also a potential upgrade story (but only towards year-end) in EMEA, Argentina in Frontier.
. Bank lending acceleration: We see Hungary, Russia, Turkey and Greece well placed within EMEA, and Kazakhstan, Romania and Pakistan within Frontier.
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. Scope for rate cuts: With Russia, Turkey (as inflation eases in 2H) and Egypt (perhaps by year-end) as candidates to cut rates in EMEA, and Kazakhstan, Argentina and Kenya in Frontier.
. Exposure to the EU rebound: Poland, Czech, Hungary and Turkey (and perhaps Greece) we see as particular beneficiaries of an improving Eurozone economy. Romania, Morocco and the smaller EU markets in Frontier.
. Idiosyncratic stories: e.g. MSCI inclusion – on the positive side, Argentina (which we see as a strong candidate for inclusion in MSCI EM - we should find out the results of MSCI’s review on 20 June); and less positively Pakistan (which has already transitioned from MSCI FM to MSCI EM at end-May, and where we see Frontier funds as likely to be net sellers, with EM investors taking their time to learn a small, volatile, new market, despite the striking discount to neighbouring India: 11.0x vs 17.3x for India on a 12M FWD P/E basis). Nigeria, we believe warrants more attention as a more freely traded FX market appears to be opening up for international investors who are generally very underweight.
Historically, investors main justification for investing in EM equities has been faster GDP growth for EM than DM feeding in to better growth of EPS. EM failed to deliver this over 2011-2015 as EM GDP growth relative to DM decelerated following the reversal of post GFC fiscal and monetary stimulus in EM as inflation picked up. Corporates found themselves with excess capacity (whether industrial or commodity) and weak pricing, while a strong dollar depressed EM FX and raised costs of debt (particularly FX denominated). May 2010-January 2016 saw EM equities underperform DM by 50%. 2016 saw EM economies start to reaccelerate vs DM and the start of the EM earnings rebound, with 18% growth in EM EPS the highest since 2010, and consensus expects an acceleration to 28% in 2017, driven by accelerating EM GDP, the rebound in energy and metals prices, as well as stronger EM currencies (the headline number is distorted by the EM FX rebound and a number of large EM corporates moving from headline loss to profit).
How does FM stack up vs EM?
1. Better growth in EM, but better recovery in FM: The IMF forecasts MSCI EM countries to grow real GDP by 4.7% in 2017– well ahead of DM’s 1.6% for 2017 and ahead of Frontier’s 3.3% (which is brought down by sluggish growth in Argentina, Kuwait and Nigeria, between them, 46% of MSCI FM). EM Asia is expected to be the fastest growing region within EM, followed by EM EMEA. However, Frontier does have a better growth acceleration than either EM or DM for both 2017 and 2018.
2. Earnings: EM has the advantage in terms of EPS growth, with 2017E EPS to grow by 16% vs 14% in Frontier and 2018E EPS growing by 12% vs 4% (however, this should be taken with a note of caution as many frontier stocks lack analyst forecasts).
3. Valuations: EM is trading on a 12M FWD P/E of 12.3x, above its post-GFC average of 11.2x. Frontier is currently on a 12M FWD P/E of 11.1x, also above its average of 9.4x. However, Frontier’s 10% discount to EM is still below its average of 5%, while EM’s discount to DM stands at 26% vs an average of 21%. On a P/B basis, FM and EM are on similar multiples (1.7x) and are somewhat below DM (2.3x); however, Frontier boasts a higher RoE than EM (11.3% vs 10.4%). EM’s RoE has improved in recent months, but has a long way to match previous high points in 2011. Focusing on dividends, Russia boasts the highest 12M forward dividend yields in EM at 6.1%. In Frontier, Mauritius, Oman and Kuwait offer the best dividend yields,
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at 9.5%, 7.3% and 6.2%, respectively. In aggregate, Frontier offers higher dividend yields than EM, at 4% vs 2.7%. In aggregate, Frontier offers a higher dividend yield than EM, at 4% vs 2.7%. Taken together, the valuations argument is more favourable for Frontier than for EM, with Frontier’s higher yields potentially attractive in an income-starved environment, though investors have to be prepared for much lower liquidity (see below)
4. Liquidity: Liquidity is still a challenge in Frontier, and may yet become worse should Argentina follow Pakistan into MSCI EM (we will find out the results of MSCI’s review of Argentina on 20 June). Liquidity in Frontier has fallen a long way from its peak in 2008, trading $490mn a day (for the current countries in MSCI Frontier, including Pakistan’s c. $100mn) vs a peak of $1bn a day in early 2008 (for the same set of countries). By contrast, EM liquidity has been picking up, with turnover currently $16.3bn per day, up from $13bn per day in March 2016, roughly 30x that of Frontier.
5. Flows: Since the start of the year, EM has seen a little under $28bn in inflows, while Frontier has lagged, seeing outflows of $0.4bn (to end-April 2017). This is partly due to inflows going overwhelmingly to passive funds ($21bn, or 75% of the total inflow), an area that is still undeveloped in Frontier; however, higher frequency data (covering 50% of Frontier AuM) has shown flows turning more positive ($0.1 in inflows over the past four weeks).
Do EM equities need to consolidate? We doubt that the pace of the EM rally can be sustained without any correction. MSCI EM is up 18% YtD in dollar terms, with a maximum pullback of just 3%). A lot of short-term good news has been priced in: global PMIs have already seen much of their recovery, the reflation trade is fairly mature, net speculative positions are now long euro vs dollar and the market has, in our opinion, already become much more relaxed about potential threats to the EM trade from US politics. Equity volatility is low, despite political noise in the US (and UK) and the diplomatic spat in the Gulf Cooperation Council (GCC). May came and went without the traditional equity bull market correction. Momentum remains good, with strong inflows in to EM funds – in our view, the risk probably comes on the (geo-)politics side – does US policy jeopardise the EM positive backdrop of a weak dollar, low rates and gradual global recovery; or does US policymaking disorder start to impact growth; or do EM political problems flare up once more in Brazil, South Africa or elsewhere; and over the longer term, to what extent is the tide turning against globalisation: US protectionism could yet reappear on the agenda, particularly if the US economy falters. For China, which is tightening lending rules and cracking down on the shadow financial sector, the run-up of debt is an obvious medium-term concern, but with China still a net international creditor, the financial system is domestically funded and the government still has relatively little debt. The risk is that greater regulations on the shadow financial sector ends up tightening financial conditions more than expected, leading to slower growth/liquidation of financial assets. The priorities emerging from October’s congress will be key. EU elections (Netherlands, France, Austria) have so far proven the doomsayers wrong – Germany goes to the polls, and perhaps Italy, in September. And lastly, there are some signs that short-run data may be rolling over: trade, ECSI, US ISM, global and EM PMIs are all off their peaks.
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Country allocation
Themes we like in EMEA include exposure to a recovering Eurozone economy (Central Europe) and interest rate cuts (Russia and later in the year, Turkey). Our conviction on Russia remains low, however, given the lack of momentum in oil, the slow pace of reform pre-elections and continued geopolitical issues. South Africa, we see as constrained by politics, and in Egypt we believe the market needs more visibility on a potential 2018 rebound and/or rate cuts to perform; Greece has the potential to perform well, but a longer-term debt deal may need September’s German elections to be out of the way. We are underweight UAE and Qatar as low beta emerging markets, and given the recent increase in regional tensions.
We are overweight Poland and Hungary, Turkey and Russia. Russia with low conviction: we do like the domestic economy rebound and rate cuts (and expect the consumer to turn positive in 2Q17), but see scope for an acceleration in reforms pre- election as limited, and assume oil to be rangebound around $50-55/bl. With progress on sanctions relief looking unlikely, marginal investors may be inclined to stay on the sidelines. We retain our overweight on Central Europe, given improving Eurozone PMI numbers and the rebound in the euro. Turkey we see as a tactical recovery story based on a rebounding economy after a weak 2H16, with strong credit growth likely to lead to a strong economic rebound and potential EPS upgrades particularly for the banks. Our twin concerns remain over the debt cycle and political longevity.
We are neutral South Africa, Greece, Egypt and Czech Republic. In South Africa, we see political risks and structural issues undermining the rebound in the economy, and the rand vulnerable in 2H. Greece has the potential to be a strong recovery story (with banks on just 0.3x BV) but where a resolution of long-term debt issues might be delayed until after September’s German elections. The Czech Republic, within CE3, we see as a low beta emerging market, with a lack of interesting listed stocks. Egypt we bring back to neutral after a 31% dollar return for the EGX30 index (more representative than MSCI Egypt) since the November lows. We still think the currency is very cheap, but the market needs visibility on the expected 2018 rebound as well as rate cuts, which might be a story closer to year-end.
We are underweight Qatar and UAE. Both are low beta vs EM. UAE we see as a 2018 recovery story: real estate prices continuing to fall in 2017. Regional tensions with Qatar may keep the market there under pressure.
Within Frontier, our main changes are to become more positive (or less negative) on Nigeria, which we upgrade to neutral. And to recommend trimming Pakistan back to neutral for Frontier managers (where the country has become off index) after strong performance.
We are overweight Kazakhstan, Bangladesh, Argentina and Vietnam. In Kazakhstan, we like the economic recovery and valuations, and see scope for positive surprises given low expectations on reform. In Bangladesh, we like the high levels of investment resulting in sustainable strong growth, and we see the country as a potential beneficiary of flows out of Pakistan from Frontier funds. In Argentina we continue to like the reform story, the economy should rebound this year, and progress on inflation could allow the central bank to reverse the recent rate hike. Argentina is a potential candidate to return to MSCI EM – we should find out on 20 June. Valuations are no longer cheap, however. In Vietnam we expect the government to privatise assets to help the budget, which in turn should help transparency; a return to a strong current account surplus eases currency worries, and we see unsatisfied demand from FM investors given foreign ownership limits.
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We are neutral Pakistan, Nigeria, Kenya, Morocco and Romania. In Pakistan, we see Frontier funds as likely net sellers after the country’s end-May transition from MSCI Frontier to MSCI EM; and whilst we like the growth story and increased infrastructure investment, political noise is likely to increase in the run up to the summer 2018 elections, and we see the currency as overvalued (contributing to poor export performance). Nigeria we think warrants attention again. Yes, there are still challenges on the reform and budget side, and investors are still assessing the new Investors’ & Exporters’ (I&E) window which is not fully transparent. The first few weeks have seen a daily average of c. $100mn of trades reported. For equity investors who can get in to Nigeria at close to NGN400/$ we believe it is worth considering starting to close underweights (or finding a way to buy local bonds). Kenya we like long term as one of the more entrepreneurial economies in Sub-Saharan Africa (SSA), but the market has run hard, as investors price in a likely peaceful August election, potentially followed by an easing of interest rate caps on the banks. Morocco, we like the growth rebound and exposure to the Eurozone recovery, but valuations are full and we see the country’s safe-haven status for investors eroded by the opening up of FX markets in Egypt and Nigeria. Romania, the growth story remains strong, and we like the exposure to a recovering Eurozone, however the quality of growth is declining as the current account widens, the budget deficit expands and inflation picks up.
We are underweight Saudi Arabia and Kuwait. In Saudi Arabia we see fiscal adjustment as an ongoing headwind to growth and which we see as low beta to EM with potential MSCI EM index inclusion still at least two years away. In Kuwait, 2016’s election resulted in a more obstructive parliament making passing fiscal reform measures politically tough and where we continue to see corporate transparency as poor.
We understand that neutral weight in Pakistan means having zero in Pakistan for frontier funds benchmarked against MSCI FM following Pakistan’s transition to MSCI EM. We don’t necessarily think Pakistan warrants a zero weight but want to indicate that we are no longer as positive on the market as we have been since early 2015. For Nigeria, Frontier investors are very underweight. Given the still less than transparent new FX window, we don’t expect that mainstream international funds will leap into the market, but we are signalling that we believe that frontier investors should do work on the market now. And finally, for Saudi Arabia, which is not included in either MSCI EM or DM, an underweight effectively means zero.
In this report
. Our country over and underweights are summarised on page 9.
. Our top stock ideas on page 12.
. Country summaries from page 25
. We have introduced a fifth factor to our top-down asset allocation model (which includes GDP acceleration, bank lending acceleration, scope for credit upgrades and cheap currencies). We now add in the interest-rate cycle. The model tells us to look at Russia, Turkey, Greece and perhaps Egypt in EM; and to be cautious on UAE and Qatar. In Frontier, Kazakhstan, Argentina and Morocco look interesting; Sri Lanka, Jordan, Saudi Arabia, Kuwait and Oman less so. Looking out to 2018, in EMEA the data supports becoming more interested in Turkey, Egypt and the UAE and fading Greece, Russia, CE3 and Qatar; and in Frontier becoming more interested in Kazakhstan, Kenya, Nigeria, Bangladesh and Saudi Arabia, Kuwait and Oman, while fading Argentina and Romania. See page 77 for more.
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. EM and Frontier from above on p 51 takes a look at growth, acceleration, liquidity, valuation and what’s happening with all the various MSCI Index changes affecting EM and FM.
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Figure 1: Renaissance Capital country summaries Country Weighting Positive Negative Emerging Accelerating economy, better-than-expected disinflation 4.1% CPI almost Lowered conviction. Oil rangebound, pre-election period should bring at the CBR’s 4.0% YE target; “below the radar” reforms, fiscal discipline. few reform surprises. Long-term growth an issue. US investigations Highest dividend yield in EM. Potential for stronger-than-expected rate mean sanctions relief off the table, and there is talk of codifying existing Russia OW cuts given disinflation and RUB strength (real rates 5%). Range-bound sanctions. EM funds already overweight. Oil/strong rouble squeezing oil argues for renewed focus on reform post election and continued EPS. Sistema headlines a negative, though we believe company pressure to improve governance at state companies. Real wages turned specific. positive in August; we see retail sales following in 2Q. Eurozone PMI at 57 good for export demand; end of dollar rally less of a currency headwind; growth acceleration part driven by EU budget cycle: Strong performance to date; PiS negative for state owned dividend Poland OW GDP grew 4% YoY in 1Q17. CHF mortgage rhetoric softening. End of story; bank regulation still a risk; political tensions with the EU expected deflation. EM funds underweight. 3.2% 10-year yields supportive for to continue. equity valuations. May PMI 62.1, an all-time high. Highest upwards earnings revisions in Risk of populist policies pre-April 2018 elections. EM funds slightly Hungary OW EM. 3.0% 10yr yields supportive for equity valuations. overweight, just 0.32% of MSCI EM (which contains only three stocks). A tactical trade only. Economy stuck in middle income trap; 120% loan- Government using balance sheet to support lending growth; exposure to to-deposit ratio limits how much further bank lending can grow. EM Eurozone recovery; some political normalisation possible, 2H disinflation funds overweight; 65% foreign ownership in line with 10-year avg. Turkey OW easing pressure on central bank (weighted avg cost of funding 12%). Nationalist-populist rhetoric including pressure on the CBT keeps Logic would suggest a more pro-business stance to boost growth and job investors edgy. CPI of 11.7% needs to come down given 10.5% 10yr creation ahead of the 2019 elections. TRY government yields. Low beta to EM. PMI survey data suggesting labour shortages Second highest dividend yield of any country in MSCI EM of 5.8% vs Czech N becoming a constraint on growth. Just 0.2% of MSCI EM (and only four 0.8% 10-year yields supportive for equity valuations. stocks). Lack of interesting corporate stories. Brexit suggests greater willingness of the EU to strike a deal. New Recovery delayed, with PMI still sub-50. Debt forgiveness politically Democracy leading opinion polls. 10-yr bond yields down from 8.5% in toxic in Germany - a more comprehensive deal unlikely before German Greece N September to 6% – yields could decline further if negotiations lead to QE elections in September. Syriza government unpredictable. At 0.38% of inclusion, supportive for banks (on 0.3x BV). MSCI EM, easy to ignore. …but Zuma could stay in power until 2019 and have strong influence Currency has held up well despite political headwinds suggesting no over successor - politics looks likely to keep international investors on South Africa N SARB hikes needed. Political noise could yet turn out to trigger positive the sidelines, and locals long hedge stocks. ZAR could be vulnerable to change… political noise. Economy failing to deliver growth or make an impact on equality or unemployment, only a small underweight EM funds. The equity story needs better visibility of rates coming down and/or Very cheap currency, attractive bond yields, rate hike negative for growth easing pressure on the consumer, perhaps a story for later in 2017. Egypt N but good for central bank credibility, FX availability. Expect investment to Only 0.12% of MSCI EM, easy to ignore. Social issues related to the pick up once rates begin to fall. adjustment and security risks remain. Low beta to EM recovery given pegged currency, oil exposure. Economies likely to recover in 2018; higher US rate environment good Economies pressured by fiscal discipline. Dubai property prices still GCC UW for the banks. Pegged currencies. Investors underweight. falling. Intra-regional politics, with Saudi Arabia, UAE, Bahrain and Egypt cutting ties with Qatar.
Note: OW=overweight, N=neutral, UW=underweight Source: Renaissance Capital
Figure 2: MSCI EMEA over/underweights Over/underweight
Overweight
Neutral
Underweight
UAE
Qatar
Egypt
Czech
Russia Turkey
Poland
Greece Hungary
South Africa South Source: MSCI, Bloomberg
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Figure 3: Renaissance Capital country summaries Country Weighting Positive Negative Frontier Economic acceleration: we expect 2.3% growth in 2017; the KZT Kazakhstan OW appears cheap on our REER measure. Modest rate cuts still to Just two stocks in MSCI Kazakhstan; only 1.9% of MSCI Frontier. come. Potential for (positive) surprises on reform agenda. Growth reacceleration in 2017. Market derated from peaks. Fiscal Currency appears expensive, though current account in surplus. deficit suggests progress on privatisations. Frontier funds Bank reform slow. US withdrawal from TPP trims trade upside. Vietnam OW underweight given ownership limits. Inflation back under 4% year- Leverage could become a concern in a slowdown: bank lending end target. Current account back in strong surplus. 131% of GDP (gov’t debt 63% of GDP). Strong GDP rebound expected in 2017. Inflation has come down Wage settlements have been running near 20% ahead of mid-term from 41% at end-2016 (Buenos Aires) to 29%, with further elections in October which Macri can’t afford to lose. Central bank declines expected though not to the central bank’s 12-17% target. Argentina OW raised rates from 24.75% to 26.25% in April – good for credibility, Potential MSCI EM re-inclusion story (announcement due on and should come down again as inflation declines. Valuations no June 20). Frontier funds still underweight; potential for rate cuts longer cheap. later in the year. The Georgian lari has stabilised, and the rebounding lira helps. Currency rally has brought GEL back to close to fair value. We Robust growth: we expect above consensus 4.2% in growth in have increased our end-2017 inflation forecast to 5.8%. Post-rally, Georgia OW 2017 and 4.1% in 2018. Exports, remittances and tourism all banks are no longer cheap (1.75-2x trailing book value) though supportive, while a pick-up in state infrastructure spend and RoE is strong. easing tax regime should help growth. Potential beneficiary of frontier fund sales from Pakistan; investment approaching 30% of GDP; exports growing and Frontier funds already slightly overweight. Poor corporate Bangladesh OW current account near balance, elections not until late-2018/early- transparency, market not cheap on 16.8x 12M FWD P/E. 2019. Good industrialisation story. Accelerating economy, improved security, China-sponsored Reforms on hold pre-summer 2018 election; associated election investment in infrastructure, electricity good for long term growth. risks; current account deteriorating, exports stagnant; big off-index Pakistan N EM transition brings valuation discount to India (11x vs 17x 12M holding for frontier funds who are likely to be net sellers. Just FWD P/E) in to sharper focus. 0.13% of MSCI EM. Starting to overheat – current account deficit doubled to 2.4% of Likely to be the fastest growing economy in the EU in 2017. Romania N GDP in 2016. Inflation picking up – the CBR expects 1.6% in 4Q17 Frontier funds underweight. and 3.1% in 4Q18. Budget deficit could breach EU’s 3% limit. Strong agriculture led rebound in 2017. New government formed, Opening up of FX markets in Nigeria, Egypt eroding Morocco as a announced continued subsidy removal. Exposure to Eurozone safe haven African market. Premium valuations given ownership Morocco N recovery. Big underweight in Frontier funds. Currency appears by local pension funds. Low beta market, private sector debt levels close to fair value. relatively high. Market has run hard since March (banks are back to 1.5x BV, Interest rate caps could be eased post-election, which should Safaricom at all-time highs), inflation spike not to reverse till year allow credit growth to pick up. Frontier funds only near neutral. Kenya N end (though we don’t anticipate rate hikes). Elections in August. Easing impact of drought. 2018 looking better for growth and Currency appears expensive on our REER model, but reserves inflation. Infrastructure projects being delivered. (and IMF support) are strong. I&E currency window an important development, which could New currency window still not transparent, investors treating with ultimately pave the way for a unified exchange rate. Valuations caution. Challenges in unifying remaining exchange rates, cheap and frontier funds deeply underweight. Potential economic implementing reforms in window before February 2019 election. Nigeria N rebound. For investors who can get in close to 400, we MSCI to rule in mid-June about ongoing eligibility for MSCI FM recommend starting to close underweights. Vice-president very inclusion. Impact of devaluation on banks particularly second tier pro-market. banks needs to be watched. Potential MSCI EM entry (2.4% weight ex-Aramco), but not till Earliest MSCI entry date 2019 still some way off. Low beta to 2019. Introduction of t+2, short selling, new QFI rules a positive. Saudi Arabia UW emerging markets. Sluggish growth for 2017: just 0.4% down from Economic reforms headwind to economy despite restoration of 1.4% in 2016 according to the IMF. bonuses and allowances. Foreigners own just 4% of the market. 2016’s election resulted in a more obstructive parliament: opposition groups hold 24 of 50 seats in the National Assembly: 2018 rebound story after negative growth in 2017. Major implementation of policy an issue (not one parliament has lasted to Kuwait UW underweight for Frontier funds. Fiscal breakeven oil price just full term since 2006). Fiscal reform measures still politically tough $49.1/bl making Kuwait defensive within the GCC to low oil prices. amidst infighting over succession to the 87-year old Emir. Company transparency poor, and guidance consistently missed. Off-Index Big vote for glasnost and perestroika Iran-style, with Rouhani’s Banking sector reform painfully slow; currency rates have yet to be re-election in the Presidential vote. End of the oil production unified. Still off limits to most international investors given lack of Iran * ramp-up dividend should pave the way for reform. International international custody and due diligence requirements to satisfy investors can now use the parallel market rate to bring in capital. compliance with remaining sanctions.
Note: OW=overweight, N=neutral, UW=underweight Source: Renaissance Capital
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Figure 4: MSCI Frontier over/underweights Over/underweight
Overweight
Underweight
Kenya
Kuwait
Nigeria
Georgia
Vietnam
Pakistan Morocco
Romania
Argentina
Kazakhstan Bangladesh Saudi Arabia Saudi Source: MSCI, Bloomberg
11 Renaissance Capital 12 June 2017 RenCapα The Focal Point
Figure 5: RenCapα – investment case Upside Name Ticker Country CP* TP Rating Case potential We expect Tencent to be the main driver of shares in Naspers in the near term and remain positive in this regard. Mobile games have been the main upside South driver in Tencent’s results over the past few years, but we think growth will Naspers NPN SJ ZAR2,645.5 ZAR3,460.0 OUTPERFORM 30% Africa inevitably slow. However, we expect mobile advertising to increasingly pick up the slack and drive upside surprises. We reiterate our OUTPERFORM rating and ZAR3,460 TP. While Sberbank’s share price notably re-rated last year, we think the story will have legs in 2017, helped by macro stabilisation, positive geopolitical risk, and Sberbank SBER RX Russia RUB154.7 RUB215.0 OUTPERFORM 39% attractive value and returns. Notwithstanding all the challenges of the past several years, Sberbank remains the only large-cap liquid banking stock (except FirstRand) delivering a 20% RoE benchmark for best-in-class EMEA banks. We believe ongoing strong LfL trends at Pyaterochka and aggressive expansion should lead to X5’s top-line outperformance in the near-to medium term. Combined with profitability improvements, this is likely to result in a best-in-class X5 FIVE LI Russia $36.6 $41.0 OUTPERFORM 12% 2016-2019E earnings CAGR of 37% in dollar terms. However, X5 shares continue to trade on an 18% / 21% discount to Lenta / Magnit on 2017E P/E, which we think is unjustified. Our top pick of the SA hospitals is Mediclinic, which has achieved the greatest geographical diversification and has the strongest management team of its SA South peers, in our view. We remain positive on the company’s Middle East expansion Mediclinic MDC LN GBP8.0 GBP9.5 OUTPERFORM 23% Africa where we see a structural growth story in the hospital sector due to a high unmet demand for quality healthcare at present and increasing lifestyle-related diseases. We forecast this exposure to drive superior growth in the medium term in pounds. Sustainable aluminium prices, robust cost control, moderate capex, and persistent dividend flow from Norilsk Nickel have created a favourable environment for Rusal operations. The company, which five years ago was trading at 9x debt/EBITDA is Rusal 486 HK Russia HKD3.8 HKD8.0 OUTPERFORM 112% set, on our estimates, to become debt-free in five years. We see an unfolding equity story for Rusal, with ongoing deleveraging and wider opportunities for dividend payments. Our calculations show that InterRAO could cover its cost of modernisation with only a single year of operational cash flow and would still be able to grow its dividend payout (of up to 145%) without harming either its balance sheet or its modernisation drive and still be in cash-accumulation mode. InterRAO’s financial InterRAO IRAO RX Russia RUB3.9 RUB7.6 OUTPERFORM 95% strength is unprecedented in the sector and we believe it is well equipped to deliver value to shareholders for at least the next 10 years while the underlying value is yet to be unlocked – at 2017E EV/EBITDA of 2.1x (a 70% discount to international peers). On a forward P/E of 16.9x, on our estimates, Tiger Brands remains the most attractively valued of the SA food producers, in our view. We believe Tiger has the strongest portfolio of brands and dominant market positions in the SA FMCG Tiger South TBS SJ ZAR386.0 ZAR460.0 OUTPERFORM 19% space, which we think the other food producers will battle to replicate owing to a Brands Africa scarcity of branded food acquisitions available. With a new management team in place, we believe there is upside potential from cost-cutting and efficiency gains and a renewed focus on innovation and marketing. We forecast Unipro to be the highest dividend payer, and owning the youngest capacity fleet in the sector should enable it to undergo modernisation without any major uptick in capex. Unipro offers current shareholders an accumulated dividend yield of 100% over the next six years. Despite trading at a relative Unipro UPRO RX Russia RUB2.6 RUB3.6 OUTPERFORM 37% premium to Russian peers (2017E EV/EBTDA of 3.1x, or an 11% premium to the Russian peer average), we forecast Unipro could deliver a 9% annualised dividend yield in 2017 and 2018, growing to a 17% yield from 2019 onwards as the Berezovskaya new unit is recommissioned. After two years of sluggish volume growth, we now see international operations (which make up 60% of total EBITDA generation) picking up on the back of stronger economic activity in Pakistan and stabilised currency in Kazakhstan. Strong and profitable growth abroad should reverse downward revisions in Coca-Cola CCOLA TI Turkey TRY37.8 TRY43.6 OUTPERFORM 15% consensus estimates. We are now 6% ahead of FY17 EBITDA Bloomberg Icecek consensus. CCI trades at 8% discount to peers, at 9.2x FY17E EV/EBITDA. Given CCI’s attractive valuation and improved short-term outlook, along with superior long-term growth drivers, we think CCI deserves to trade premium compared to peers (at least 10% premium). All data as of close 5 June 2017 Source: Bloomberg, Renaissance Capital estimates
12 Renaissance Capital 12 June 2017
The Focal Point
Figure 5: RenCapα – investment case (continued) Upside Name Ticker Country CP* TP Rating Case potential We believe Ulker is a great company to play the normalisation we expect in Turkey after the referendum. The stock has underperformed domestic and global peers over the past nine months, largely, in our view, due to media reports of criticism and possible legal action against the company – management denied these reports and said it had faced no legal action. Operationally, the company continues to benefit from restructuring and inorganic growth. Assuming that another acquisition in Saudi Arabia completes in 2017, our FY17/FY18 net income estimates are Ulker ULKER TI Turkey TRY20.7 TRY24.8 OUTPERFORM 20% 8%/12% ahead of consensus. Ulker trades at an FY18E P/E of 15.4x and EV/EBITDA of 9.6x, on our estimates, corresponding to c. 25% discounts to Bloomberg’s Global Confectionery Index averages of 19.3x and 11.5x, respectively. The stock has had a strong correlation with global peers in the past and has tended to trade in line with this index. Given what we view as Ulker’s stronger growth profile and improving margins, we see the current discount to peers as unjustified. Strong results and FCF in 2016 and a low ND/EBITDA translated into adoption of new dividend policy allowing the company to pay c.100% of FCF (9% yield on 2016) with the possibility of interim dividends. We think GLTR’s operating leverage, Globaltrans GLTR LI Russia $8.0 $9.1 OUTPERFORM 14% positive backdrop in the open gondola market (despite headwinds in rail tanks) and balanced capex will lead to strong FCF in 2017. Moreover, we think given the difficulty in forecasting the timing of tariff adjustments, the company is likely to see consensus upgrades over the next reporting periods. We see upside potential in TBC as we incorporate the Bank Republic (BR) consolidation in our model. We estimate TBC trades at a 14-17% discount to the TBC TBCG LN Georgia GBP17.0 GBP19.4 OUTPERFORM 14% BGEO stand-alone banking business, and, in our view, is the better play on Georgia's recovery story. We rate El Sewedy Electric as OUTPERFORM as it is the largest beneficiary of the El Sewedy SWDY EY Egypt EGP88.0 EGP125.0 OUTPERFORM 42% devaluation and is continuing to expand its backlog, ensuring the growth of the Electric turnkey business. With 75% market share, we believe Telecom Egypt is well positioned to benefit Telecom from increasing broadband penetration in an under-penetrated market; the best ETEL EY Egypt EGP10.4 EGP15.9 OUTPERFORM 54% Egypt network in the market (optic-fibre) ensures dominance in the wholesale segment and provides a solid and diversified source of income to its revenue stream. Grindrod is our top pick in the general industrials space. We believe dry bulk shipping rates have room to recover over the next few years as supply is South Grindrod GND SJ ZAR11.0 ZAR13.8 OUTPERFORM 26% constrained and demand begins to recover. Dry bulk shipping terminal rates have Africa recovered from their lows of 12 months ago and volume has recovered with higher commodity prices and ring-fenced rail capacity. Given the company’s relative size, management’s market insights and focus on brands and innovation, we believe Rhodes is well positioned to continue gaining Rhodes South market share and expanding in the regional market. While our outlook for the RFG SJ ZAR25.3 ZAR30.0 OUTPERFORM 18% Food Africa international division is muted in the medium term, we believe regional growth will more than compensate for this. In our view, Rhodes offers the best growth potential of the SA food producers under our coverage in the medium term. Although current ad market trends are strong, supporting Yandex’s top-line growth, the company continues to see declining search share on mobile, with no progress on the FAS / Google case, and we do not expect this negative structural trend to Yandex YNDX US Russia $27.2 $17.2 UNDERPERFORM -37% reverse in the medium term. In the near term, we think the market under-estimates the investments in taxi business required to successfully compete against Uber and Gett, and we believe that 2017 EBITDA consensus needs to come down, driving share-price underperformance over the next 6-12 months. DSY remains a high-conviction UNDERPERFORM call as we expect a potential Discovery South DSY SJ ZAR128.3 ZAR85.0 UNDERPERFORM -34% rights issue or a material slowdown in new business given its capital and liquidity Holdings Africa constraints. All data as close of 5 June 2017 Source: Bloomberg, Renaissance Capital estimates
13 Renaissance Capital Introduction 12 June 2017
The Focal Point
Back in November (when we published Hotel California) it looked as though 2017 could be a tough year for EMs as Donald Trump’s unexpected election victory pointed to greater fiscal expenditure, higher inflation, a steeper path for US interest rates, and a stronger dollar all mixed in with greater protectionism. All in all, a pretty toxic mix for EM equities, which sold off 10% in dollars from their 3Q peak.
By accident if not design, 2017 is turning out to be much better than anticipated, with EM equities up 17% YtD, more than recouping their 4Q losses, and the best start to a year since 2009. EM equities have recovered their post-US election underperformance vs DM.
Why the sudden turnaround for EM?
1. Protectionism fears subside. Despite campaign rhetoric, Trump has backpedalled on labelling China as a currency manipulator and/or withdrawing from NAFTA. A new trade deal with China has even been unveiled, goals for NAFTA’s renegotiation are modest, and the door has been opened to reviving EU trade talks, plans for a border adjustment tax have met resistance though Trump has criticised Germany’s trade surplus with the US.
Figure 6: Exports to US, 2015, % of exports and of GDP (capped at 30%) Figure 7: ‘Death spiral’ of world trade during the Great Depression ($mn) Exports to US, % of total exports, 2015 January Exports to US, % of GDP, 2015 4000 30% 81% December February 3000 25% November 2000 March 1929 20% 1000 1930 15% October 0 April 1931 10% 1932 5% September May 1933
0%
UAE
Peru
India
Chile
Brazil Qatar
Egypt
China
Korea
Oman
Kenya Serbia
Kuwait June
Turkey Russia Jordan
Poland August
Mexico Nigeria
Taiwan Tunisia Croatia
Greece
Estonia
Bahrain
Vietnam Senegal
Hungary
Thailand Pakistan Morocco Slovenia
Lebanon
Malaysia
Romania
Mauritius
Lithuania
Colombia
Sri Sri Lanka
Argentina Indonesia
Philippines July
Ivory Coast Ivory
Kazakhstan
Bangladesh South South Africa
Czech Czech Republic
Source: Bloomberg Source: League of Nations’ World Economic Survey, 1932-33
2. Political noise in the US has been a hurdle to passing tax legislation (including corporate tax cuts and incentives for US companies to repatriate overseas earnings) as well as healthcare reform and infrastructure spending, with commentators suggesting plans are likely to be watered down, and a 2018 rather than 2017 story now.
3. US inflation expectations ease. US inflation expectations have come down as so-called Trumpflation has looked less likely: five-year inflation swaps have come down from a 2.6% peak in January to sub 2.3%; while headline inflation has come off from 2.7% in February to 2.2% in April. 10-year bond yields have fallen from 2.6% in March to 2.2% by end May.
4. Fed expectations have stabilised. And with it the pace of US tightening: after an expected June hike by the Fed, the market is pricing in only a 42% chance of another hike by year-end; meanwhile the European Central Bank (ECB) is not expected to start tapering QE until 1H18. Only gradual rate hike expectations are allowing yield seeking flows into EM fixed income to continue – the EMBI global spread has come down from a peak of 407 in November to 322 in May, but is still above the 240 post-GFC low, which could suggest that “picking up pennies in front of a steamroller” could have further to go.
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Figure 8: US Inflation expectations falling… Figure 9: Fed Fund futures probabilities indicate one more hike to come
US inflation Swap Forward 5y5Y Dec 17 Rate expectations Dec 18 Rate expectations 3.4 2.00 3.2 1.75 3.0 2.8 1.50 2.6 1.25 2.4 2.2 1.00 2.0 0.75 1.8
1.6 0.50
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Oct-16 Apr-17
Jun-16 Jan-17 Jun-17
Feb-17 Mar-17
Aug-16 Sep-16 Nov-16 Dec-16 May-17
Source: Bloomberg Source: Bloomberg
5. Dollar stable/lower – on a trade weighted basis, the dollar peaked at the end of 2016, having gained 6% in the aftermath of the US election. The dollar has subsequently given back all almost all its post-election gains as inflation expectations have come down and with it bond yields and expectations of Fed tightening; tax legislation (including incentives for corporates to repatriate overseas earnings) has hit obstacles and fears of overt protectionism have eased. We note that CME speculative positioning is now long euro vs dollar.
Figure 10: Dollar rally – may be running out of steam? Figure 11: Market weighted REER MSCI EM REER LT avg Dollar Index EM Ex China REER LT avg 105 125 100 120 95 115 90 110 85 105 80 100 75 95 70 90
65 85
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg Source: MSCI, Bruegel, Bloomberg
Should investors continue to chase the rally? We believe yes, but with the caveat that with EM up 21% from the November lows (and the S&P 500 up 16%), markets are likely to encounter profit taking at some stage.
We see five important drivers as supportive for EM equities over the remainder of 2017
1. Synchronised global recovery. The IMF is expecting a more synchronised global recovery this year. For the first time since 2007, the IMF expects all the top-40 largest countries in the world to show positive growth (with growing countries in aggregate representing 98% of global GDP). 64% of global GDP is expected to be in countries which have accelerating growth, up from 29% in 2016. And for the first time since 2007, all countries in MSCI EM and MSCI DM
15 Renaissance Capital 12 June 2017
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are expected to be showing positive growth. In 2018, all EM regions should be growing faster than DM.
Figure 12: 2017E GDP growth and acceleration Figure 13: 2018E GDP growth and acceleration
2017E Real GDP Growth (% YoY) 2017E GDP acceleration (ppts) 2018E Real GDP Growth (% YoY) 2018E GDP acceleration (ppts) 7% 7% 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 0% 0% -1% -1% EM-Asia EM FM EM-EMEA DM EM-LatAm EM-Asia EM FM EM-EMEA EM-LatAm DM
Source: IMF April 2017 WEO Source: IMF April 2017 WEO
2. Accelerating – but not overheating – global growth. With global headwinds of fiscal tightening, the euro crisis, deleveraging, the EM/BRIC slowdown and commodity price collapse all fading: the IMF expects global growth to accelerate to 3.5% in 2017 (from 3.1% in 2016) and to 3.6% in 2018. No, not exciting compared with the kind of excesses which saw global growth compound at more than 5% annually over 2004-2007, and which resulted in a market damaging spike in commodity prices (and global inflation). There are arguments why ageing populations, leverage and ‘peak globalisation’ could lead to lower trend growth – indeed, global working age population growth alone has halved from 2% in 1990 to 1% in 2015.
3. Subsiding political risk. Policy so far in the US has been less anti-trade than had been feared; Trump’s relationship with Chinese President Xi Jinping has got off to a better than expected start. Meanwhile, the Austrian, Dutch and French election results have been market-friendly and recent polls put Germany’s Chancellor Angela Merkel in a strong position for September’s federal election.
4. EM relative acceleration to DM. After four years of relative deceleration of EM economies vs DM over 2012-2015, 2016 was the first year of relative EM reacceleration. The IMF expects this trend to continue in 2017 and during 2018- 2022 (we note that the IMF doesn’t include a US recession in to its numbers, one would be well overdue by 2022…).
16 Renaissance Capital 12 June 2017
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Figure 14: EM-DM relative growth and performance Figure 15: Global growth
MSCI EM relative to DM ($) EM-DM growth (RHS) DM EM World EM-DM growth (forecast) 300 7 10 6 8 250 5 6 200 4 4 2 150 3 2 0 100 1 -2
50 0 -4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
2018F 2019F 2020F 2017F
Source: IMF, Bloomberg Source: IMF,
5. Global trade has broken out of its weak trend. Global trade volumes have broken out of their recent six-year trend of around 0.5% growth and while off recent peaks are currently running at 1.4% YoY on a three-month moving average basis (down from 2.6% in January). Meanwhile, the global manufacturing PMI (52.8 in April) is near five-year highs, the Eurozone’s manufacturing PMI has surged from 51.7 in August to a flash reading of 57.0 for May. The US ISM Manufacturing PMI for April was 54.8, up from 49.4 in August, but off a 57.7 high in February.
Figure 16: Global manufacturing PMI picking up… Figure 17: Global trade breaking out (3m/3m % chg)
60 Global Manufacturing PMI 5%
55 4% 3% 50 2% 45 1% 40 0%
35 -1%
30 -2%
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-06
Source: Bloomberg Source: Bloomberg
6. Flows turn positive in EM equities –there could be a lot further to go. 2017 to date, EM equity funds have seen an impressive $28bn of inflows (or 3% of AUM). 78% of which has been received via ETFs. EM debt funds have seen $33bn of inflows (or 10% of AUM) YtD. Since EM equity flows turned in June last year, $37bn has returned to EM equity funds, however this inflow comes after three successive years of outflows from EM equity funds totalling $155bn (over 2013-16). To date, still less than one-quarter of those outflows have returned to the asset class (in comparison to EM debt, where of $61bn has returned of the $72bn of outflows over the same period (or 85%).
17 Renaissance Capital 12 June 2017
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Figure 18: EM equity and debt flows since peak cumulative inflow (peak = 0) Figure 19: EM headline EPS growth and consensus forecasts
Cumulative EM equity flows, $mn EM EPS growth, % YoY Forecast Cumulative EM debt flows, $mn (RHS) - - 60% -20,000 -10,000 50% 40% -40,000 -20,000 -60,000 30% -30,000 -80,000 20% -40,000 10% -100,000 -50,000 0% -120,000 -10% -140,000 -60,000 -20% -70,000 -160,000 -30%
-180,000 -80,000 -40%
2010 2011 2012 2013 2014 2015 2016
Feb-13 Feb-14 Feb-15 Feb-16 Feb-17
Aug-13 Nov-13 Aug-14 Nov-14 Aug-15 Nov-15 Aug-16 Nov-16
May-13 May-14 May-15 May-16 2017E 2018E
Source: EPFR Source: Bloomberg
7. Earnings starting to drive the EM rally. The EM rally appears to be being supported by earnings. Though MSCI EM is up 17% YtD, its 12M FWD P/E has remained close to 12x. While the valuation is not in itself amazingly cheap (vs EM’s own history) what it does show is that the current rally is being driven primarily by earnings. This year consensus is suggesting 28% dollar EPS growth for MSCI which if achieved would be the highest EM earnings growth since 2010 (if 28% earnings growth is achieved, an additional 10% move in MSCI EM by year-end could be warranted on earnings alone). The cycle high for the 12M FWD P/E of MSCI EM is 12.8x.
8. Not much of a catch-up after six years of underperformance. The EM rebound since the November loans has only reversed the post-election underperformance of MSCI EM vs DM. MSCI EM’s cumulative underperformance vs DM was 50% over May 2010 – January 2016; the recent EM rally has seen EM regain only about 14% of that relative underperformance. However, poor EM earnings performance over this period suggests that much of this underperformance may already be ‘baked in’.
Figure 20: MSCI EM vs MSCI DM since EM’s inception
MSCI EM relative to DM 400
350
300
250
200
150
100
50
Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16
Source: Bloomberg
9. EM return on equity rebounding – four years of EM RoE declines took MSCI EM’s trailing RoE from 16.6% in July 2011 to 10.0% by October 2016. Since then, a modest recovery has seen RoE improve to 11.4%, now slightly higher than 10.7x for MSCI World.
18 Renaissance Capital 12 June 2017
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10. EM EPS forecasts rebounding – having troughed in February 2016, EM 12M FWD EPS forecasts have increased by a cumulative 21%, significantly outpacing the 11% increase in DM 12M FWD EPS over the same time.
Figure 21: 12M fwd EPS, EM vs DM Figure 22: Trailing RoE, EM vs DM MSCI EM trailing RoE (%) LT. avg. MSCI EM 12M fwd EPS ($) MSCI DM 12M fwd EPS ($) 170 20 MSCI DM trailing RoE (%) LT. avg. 160 150 140 15 130 120 10 110 100 90 5 80 70
60 0
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg Source: Bloomberg
As a base case, we see the backdrop as continuing to support EM. With EM GDP growth acceleration exceeding that of DM; with the Fed tightening only gradually (and the European Central Bank (ECB) unlikely to begin tapering QE before 2018); and with inflows to date in EM just a small fraction of the cumulative outflows over 2013-2016 and with a sharp rebound in earnings anticipated, that EM is able to continue performing over the remainder of the year.
This is less of an outright valuation story however. The 12M FWD P/E for MSCI EM is 12.3x, just 10% above its 10-year average (DM is trading 21% above its ten 10-year average valuation, and the S&P Index, 24% - or 1.9 standard deviations - rich). EM’s discount to DM of 27% is not far off the 10-year peak of 32% in November 2015, and still one standard deviation away from the 18% average of the last decade.
Against the EMBI spread, EM equities are trading slightly expensive versus history: 12.1x, very slightly above the 11.4x expected based on a 12M FWD P/E basis according to the 10-year correlation); and similarly on dividend yield, while the 12M FWD dividend yield for EM is 2.7%, slightly below the 2.9% expected based on a 10-year correlation.
Figure 23: Valuations unexciting, but not yet stretched… Figure 24: …relative valuations in line with history EM 12M fwd P/E prem/disc. vs DM EM 12M fwd P/E Rolling 10yr average +/- 1SD Rolling 10yr average 18 20% +/- 1SD
16 10% 0% 14 -10% 12 -20%
10 -30% -40% 8 -50%
6 -60%
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 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
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 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg Source: Bloomberg
19 Renaissance Capital 12 June 2017
The Focal Point
Figure 25: EM 12M fwd P/E vs EMBI Spread Figure 26: EM 12M fwd dividend yield vs EMBI spread 17 5.5
15 5.0 4.5 13 4.0 11 3.5 9 3.0
7 2.5
5 2.0 100 200 300 400 500 600 700 800 900 100 200 300 400 500 600 700 800 900
Source: Bloomberg Source: Bloomberg
What could go wrong?
Aside from the usual political risks in EM, the main external risks we see are as follows:
1. Politics. Our base case is that with Republicans controlling Congress that impeachment is not on the agenda, but at what point does lack of visibility and consistency on US policymaking become growth disruptive? And if the US economy falters, does the Trump administration revert to protectionism and trade barriers as the solution? Within EM, politics in Brazil, South Africa (and Venezuela for headline risk) are worth tracking; Kenya, Czech Republic, Argentina, Russia, Hungary and, Pakistan all face elections over the next 12 months.
2. Geopolitics. North Korea and Syria have the potential to create geopolitical flashpoints. US investigations in to Russian influence in the elections could result in US sanctions becoming enshrined in to law (making them harder to undo) or even tightened. Brexit too could yet create its own headlines as negotiations get under way in 2017-2018 given the inconclusive election result. Italy has proposed holding early elections, perhaps as soon as this September. Heightened tension between Qatar and GCC neighbours provides an additional element of risk.
Figure 27: US economic expansions since 1854 Figure 28: Cumulative GDP growth over US expansions
Months Avg since 1945 Avg since 1854 60% 1949 1954 140 50% 1958 120 1960 40% 1970 100 1975 30% 80 1980 60 20% 1982 40 1991 10% 2001 20 2009 0 0% Avg
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40
1854 1858 1861 1867 1870 1879 1885 1888 1891 1894 1897 1900 1904 1908 1912 1914 1919 1921 1924 1927 1933 1938 1945 1949 1954 1958 1961 1970 1975 1980 1982 1991 2001 2009 Quarters
Source: NBER, Renaissance Capital Source: BEA, Renaissance Capital
20 Renaissance Capital 12 June 2017
The Focal Point
3. Watch out for that 3Q18 crash…???
The US recovery is currently in its 32nd quarter, and will reach its eighth anniversary this June. That makes it the third-longest recovery post-1945. The last 10 expansions have lasted 60.5 months on average, or just over 20 quarters.
But cumulative real GDP growth to date in the current expansion is 17%, well below the 25% average of the 10 post-1945 expansions. If we assume the US economy can maintain a 2.5% per annum growth rate, we should expect the 25% threshold to be breached in 3Q19 – which if markets were to price in 6-12 months ahead of time could see 3Q18 as a good time to sell.
Figure 29: EM, US CPI and the Fed – 1994 - 2002 Figure 30: EM, US CPI and the Fed – 2003 - present MSCI EM Fed funds rate (%, rhs) MSCI EM Fed funds rate (%, rhs) US CPI 3% US CPI 3% US 10yr yield (%) US 10yr yield (%) 600 8 1,400 10 550 7 1,200 8 500 6 6 1,000 450 5 4 400 4 800 2 350 3 600 300 2 0 400 250 1 -2
200 0 200 -4
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 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg, Renaissance Capital Source: BEA, Renaissance Capital
Figure 31: Major MSCI EM downturns MSCI EM MSCI EM US CPI>=3% CPI>=3%-EM peak peak (month) decline (%) (month) (months) Sep-94 -33 Sep-94 0 Oct-97 -59 Sep-96 13 Feb-00 -54 Feb-00 0 Oct-07 -66 Oct-07 0 May-11 -31 Apr-11 1
Source: Bloomberg
3% US CPI would be a warning signal – we are still far away. The four big crises hitting EM equities in this analyst’s career have been: the tequila crisis (1994, where MSCI EM declined 33% in dollar terms), the Asian crisis (1997, -59%), the tech crisis (2000, -54%), and the global financial crisis (2008, -66%). All were to an extent a reaction to tighter US policy – but the sell-offs all came at different levels of Fed funds rate and US bond yields.
Where there was some consistency was that on each occasion, the sell-off coincided with or came shortly after US headline CPI hit 3.0%. Why should 3.0% CPI matter? It may be coincidence, or it could be about market perceptions: given that – alongside maximum sustainable employment – the Fed targets inflation of 2.0% (technically for its favoured PCE measure), when headline inflation is below, at, or not too far above, 2.0%, investors can be quite relaxed about only a gradual pace of Fed tightening; with inflation at 3% or above, the risk becomes one of a sharp ‘catch up’ of rate hikes by a ‘behind the curve’ Fed – it is this (dollar positive) realisation that has contributed to EM sell-offs in the past. With April’s US CPI print just 2.2% (and PCE inflation only 1.5%),
21 Renaissance Capital 12 June 2017
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we are still in the comfort zone – there is still likely to be room for the US to absorb some fiscal stimulus in 2017 without the Fed needing to go into emergency hike mode.
4. China slowdown fears
The Chinese authorities are trying to de-risk the financial system by clamping down on the shadow banks. There has been a sharp slowdown in state fixed asset investment growth from 24% in mid-2016 to 14%, but total fixed asset investment growth has slowed less markedly, from 10.5% to 8.9% as private investment has rebounded from a slight negative in mid-2016 to 7%. Real estate policy is being tightened: 46 cities have tightened down-payment rules for home purchases, with most tier-1 and tier-2 cities now requiring at least 30% down-payment on first-home purchases (35-80% in Beijing and Shanghai). The net credit impulse was c. -1% of GDP in March. Most of China’s tightening has been voluntary, and we doubt that the authorities will be keen to see a significant growth slowdown ahead of the 19th Party Congress which is expected to see significant changes in China’s top decision makers. China’s credit cycle is overextended, with a worrying amount of credit being extended per unit of GDP created, but very low net government debt to GDP and China’s position as a net external creditor put it in a strong position to continue tackling issues in SOEs and the financial system giving time to attempt to rebalance the economy. Foreign ownership of Chinese bonds is just 4% of the total (or $61.5bn) and outstanding foreign debt just 13% of GDP ($1.4trn) vs $3trn of foreign exchange reserves.
Figure 32: Private investment is rebounding, state investment is slowing Figure 33: China new lending is slowing… China Total investment in Fixed Assets State Private Change in net new lending to GDP Net new Lending to GDP 30 50
25 40
20 30
15 20
10 10
5 0
0 -10
-5 -20
Jul-13 Jul-14 Jul-15 Jul-16 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg Source: Bloomberg
Figure 34: EPS revisions ratio improving Figure 35: Eurozone Manufacturing PMI in strong territory
EM 12M fwd EPS revisions ratio Eurozone Manufacturing PMI 10% 60 58 5% 56 54 0% 52 50 -5% 48 46 -10% 44 42
-15% 40
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg Source: Bloomberg
22 Renaissance Capital 12 June 2017
The Focal Point
Figure 36: Commodity price indices ($) (rebased to 100 on 31 Dec 2009) Figure 37: EM current accounts looking healthier
Iron Ore Oil Copper 2012 2017E 180 12 160 10 8 140 6 120 4 100 2 80 0 -2 60 -4 40 -6
20
Peru
India
Chile
Brazil
Egypt
Turkey Poland
0 Mexico
Greece
Thailand
Colombia
Indonesia
South Africa South
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Czech Republic Czech
Source: Bloomberg Source: Bloomberg
23 Renaissance Capital 12 June 2017
The Focal Point
Figure 38: Key elections Country Year Type Date Confirmed UK 2017 General election 8/6/2017 Yes France 2017 Legislative 11/6/2017 Yes Senegal 2017 National Assembly 2/7/2017 Yes Rwanda 2017 Presidential 4/8/2017 Yes Kenya 2017 General election 8/8/2017 Yes Germany 2017 Federal election 24/09/2017 Yes Czech Republic 2017 Legislative 21/10/2017 Yes Argentina 2017 Legislative 22/10/2017 Yes Chile 2017 General election 19/11/2017 Yes Slovenia 2017 Presidential 31/12/2017 No Lebanon 2017 Parliamentary TBD No Colombia 2018 Legislative 11/3/2018 Yes Russia 2018 Presidential 18/03/2018 Yes Hungary 2018 Parliamentary 30/04/2018 No Egypt 2018 Presidential 8/5/2018 No Italy 2018 General election 21/05/2018 No Colombia 2018 Presidential 27/05/2018 Yes Pakistan 2018 General election 5/6/2018 No Zimbabwe 2018 General election 31/07/2018 No Mexico 2018 General election 31/07/2018 No Malaysia 2018 General election 24/08/2018 No Bangladesh 2018 General election 31/10/2018 No Brazil 2018 General election 31/10/2018 No Nigeria 2019 General election 16/02/2019 Yes Indonesia 2019 General election 19/04/2019 Yes India 2019 General election 31/05/2019 No South Africa 2019 General election 31/05/2019 No Greece 2019 Legislative 20/10/2019 No Turkey 2019 Presidential 3/11/2019 No Croatia 2019 Presidential 21/12/2019 No Estonia 2019 Parliamentary 31/12/2019 No Ukraine 2019 Parliamentary 31/12/2019 No Ivory Coast 2020 Presidential 31/10/2020 Yes Croatia 2020 Parliamentary 23/12/2020 No Source: National Democratic Institute, IFES Election Guide
24 Renaissance Capital Russia 12 June 2017
The Focal Point OVERWEIGHT
Russia’s economy is recovering (weather-adjusted electricity demand is growing 3% YoY, Valuations April’s industrial production growth was 2.3% and May’s industrial PMI 52.4, with Current 6M prior 5Y avg 10Y avg manufacturers reporting a pick-up in new orders). April and May’s 4.1% inflation prints are 12M fwd P/E 5.6 6.5 5.6 6.6 almost at the central bank’s 4% year-end target which we expect to translate into further Vs EM -54% -43% -50% -41% declines in interest rates. Budget discipline is being maintained, with the finance minister S-N* P/E 6.9 8.8 *S-N = Sector adjusted suggesting that the budget deficit might be just 2.1% of GDP in 2017. What’s not to like? Source: Bloomberg, Renaissance Capital Well, MSCI Russia is at the back of the EM pack YtD (admittedly after an impressive 2016). The market has sold off as investors have priced in no easing of US or EU Positioning sanctions given the various US investigations into Russia, alongside the election of Current 6M prior 5Y avg 10Y avg Emmanuel Macron as French President and polls suggesting Angela Merkel’s likely Positioning vs EM 1.0% 0.8% 0.0% -0.2% reelection as Chancellor in September pointing to a continuation of current EU policy on Source: Bloomberg, Renaissance Capital Russia. Oil’s sharp swings between $56/bl and $48/bl over the past months has disorientated investors, and it’s worth noting that given the strong rouble, oil at $48/bl is Earnings down 20% if measured in rouble terms YtD. If our 2017 oil price assumption of $55/bl is Net +ve Forecast Growth 3M revisions chg (3M) valid, on a risk adjusted basis we would prefer to buy the market on dips at low oil prices. 2017 EPS -0.9% -29.4% -7.5% Rosneft’s court case against Sistema over Bashneft has also hurt sentiment (though we 2018 EPS 24.2% -25.5% 1.3% believe it should be an isolated issue). Over the medium term, consensus growth Source: Bloomberg, Renaissance Capital expectations of 1.5-2.0% are actually not bad when measured on a per-capita basis, and though former finance minister Alexei Kudrin is due to present his ideas on boosting long- Dividends term growth post-election in Russia. Investor expectations for sweeping Current Rank in EM reforms/liberalisation are very low in the run up to the Presidential elections in 2018, and 12M fwd dividend yield 6.1 1 Source: Bloomberg, Renaissance Capital probably post-election too. However, if does oil remain rangebound, pressure to accelerate reforms could mount. FX REER % over/under Russia remains an oil play (see graph below), but we see the story as boosted by: 1) Spot fair value fair value domestic recovery (4Q16 growth was already positive, and we see GDP growing by an FX valuation 56.9 67.6 18.8% above consensus 1.7% this year with the consumer turning positive in 2Q); 2) strong Source: IMF, Bruegel, Bloomberg, Renaissance Capital delivery on disinflation (CPI of 4.1% in April has almost converged with the Central Bank of Russia’s 4% year-end target) leading to interest rates cuts (we have seen the central Figure 39: MSCI Russia vs MSCI EM MSCI Russia ($) MSCI EM ($) bank policy rate cut by 75 bpts YtD to 9.25% and see rates at 8.0% by year-end and 7.5% 160 by end-18); 3) ‘below the radar’ reforms such as shutting weak banks, reducing capital 140 flight and progress (albeit gradual) on boosting dividends from state-owned companies. 120 The improving domestic economy and interest rate cuts imply that investors should 100 overweight domestic stocks. However, this is tempered somewhat by our expectation for a weaker rouble (towards RUB60-62/$) heading into the summer. We therefore 80 recommend portfolios maintain some export exposure in the mix. 60 40
While it’s nothing new that Russia is the cheapest market in MSCI EM on a 12M FWD P/E
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 basis, it is worth noting that Russia is also still the cheapest market on a sector-adjusted Jan-10 basis, and its discount to its 10-year average is the second highest in EM. Improved dividend payouts (notwithstanding only limited compliance with the government’s dividend Source: MSCI, Bloomberg target) also mean that Russia has the highest forward dividend yield of any market in MSCI EM of 6.1%. On the negative side, Russia is the third most overweight market Figure 40: MSCI Russia and EM 12M fwd P/E (x) MSCI Russia 12M fwd P/E (x) among active managers in MSCI EM countries. Geopolitics sensitive US funds (a majority MSCI EM 12M fwd P/E (x) of US domiciled actively managed EM funds are underweight Russia) might need to 16 become more positive to move the market (a majority of the equivalent non-US domiciled 14 funds are already overweight). And the strong rouble and oil price correction have 12 resulted in Russia having the worst 2017 three-month EPS revisions ratio in MSCI EM. 10 8 We highlight Sberbank, X5, MTS, Rusal, InterRAO, Mail, Aeroflot, Unipro, Globaltrans, 6 OGK2, and Medical Group (see page 50 for target prices and ratings). 4
2
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, Bloomberg
25 Renaissance Capital 12 June 2017
The Focal Point
Figure 41: MSCI Russia vs oil, $
Today MSCI Russia vs Brent, $ (trend)
1,800
1,600
2007 2008 1,400
1,200
2011 2006 1,000 2010 2012
800 2005 MSCI Russia, $ Russia, MSCI 2017 2013 1997 2004 2009 600 2016 2014 1998 400 2003 2002 2001 2015 200 1999 2000 1996 0 1995 0 20 40 60 80 100 120 140 160 Brent spot, $
Source: Bruegel, Bloomberg, Renaissance Capital
26 Renaissance Capital South Africa 12 June 2017
NEUTRAL The Focal Point
April saw CPI fall to 5.3%, back within the South African Reserve Bank’s (SARB) 3-6% Valuations range – consensus sees year-end CPI of 5.2% which should allow the SARB to keep Current 6M prior 5Y avg 10Y avg rates at 7%, without needing to hike. 1Q17 saw a second sequential negative QoQ 12M fwd P/E 14.5 13.7 14.2 12.4 seasonally-adjusted GDP print, but an easing of headwinds from the rand, food and Vs EM 18% 19% 28% 12% mining should help the economy rebound from 0.3% growth in 2016 to (a still S-N* P/E 12.2 12.9 *S-N = Sector adjusted unimpressive) 1.0% in 2017 and 1.6% in 2018 (Bloomberg consensus). The cabinet Source: Bloomberg, Renaissance Capital reshuffle which saw Finance Minister Pravin Gordhan replaced has renewed fears about both fiscal discipline and reform: both S&P and Fitch have subsequently downgraded SA Positioning to sub-investment grade. So far the market has been able to ignore President Jacob Current 6M prior 5Y avg 10Y avg Zuma and new Finance Minister Malusi Gigaba’s references to a needed “radical Positioning vs EM -0.4% -0.2% -0.9% -0.5% Source: Bloomberg, Renaissance Capital economic transformation” potentially including nationalisation, an acceleration of ownership diversification and redistribution of agricultural land. The focus is now on the Earnings June nominations to the 16-20 December elective conference – which is due to appoint Net +ve Forecast Growth the next ANC leader and presidential candidate ahead of the next general election, due in 3M revisions chg (3M) 2019 – with both Dr Dlamini Zuma (the president’s ex-wife and favoured successor) and 2017 EPS 12.5% -19.9% -1.8% the more market-favoured Deputy President Cyril Ramaphosa in the running. We see the 2018 EPS 18.6% -23.1% 1.7% Source: Bloomberg, Renaissance Capital December outcome as still too close to call but note that among the Tripartite Alliance, both the South African Communist Party (SACP) and Congress of South African Trade Dividends Unions (COSATU) have been lobbying against Zuma and in favour of Ramaphosa. Current Rank in EM Politics is likely to weigh on the market at least until year-end, particularly if “radical 12M fwd dividend yield 3.2 8 economic transformation” becomes a pre-election rallying point. Source: Bloomberg, Renaissance Capital
The EM risk-on/carry trade has allowed the rand to rally back to the level seen on the eve FX REER % over/under of Gordhan’s replacement at end-March, and is now within 5% of fair value on our REER Spot measure. We see the rand as vulnerable to political noise, and we think on a fundamental fair value fair value FX valuation 12.9 12.3 -4.7% basis the long-term fair value for the rand is ZAR12.3/$, but expect it to stay in our original Source: IMF, Bruegel, Bloomberg, Renaissance Capital range of ZAR13.0-13.5/$ for the next few months. Weakened by political nervousness (part offset by the appetite for EM), we anticipate a weakening to ZAR14.0/$ (potentially Figure 42: MSCI South Africa vs MSCI EM, beyond) in 2H17 ahead of the ANC election and credit rating agency updates. We note performance that 90% of SA’s government debt is rand denominated and thus remains investment MSCI South Africa ($) MSCI EM ($) grade. We maintain exposure to rand hedges given the risk of consensus ratings 140 downgrades in 2H17. 120 In metals and mining, we have a positive stance on diversified miners. We still calculate long-term value in some diversified mining companies using what we believe are 100 conservative margin assumptions. Effective cost-cutting, aided by productivity gains and 80 combined with a commodity price recovery, has driven positive earnings momentum. Near- term FCF yields appear attractive to us and could translate into supportive dividend yields. 60
The biggest risks we see are a cyclical downturn in commodity prices and poor capital
Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
allocation. While gold sector margins have normalised, negative earnings momentum Jul-10
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 continues to weigh on gold sector stocks, and we remain cautious about the benefits for Source: MSCI, Bloomberg gold miners of a sustained gold price recovery against the backdrop of what we think could be a potentially value-destructive growth agenda on the part of these companies. We Figure 43: MSCI South Africa & EM 12M fwd P/E therefore maintain our bearish stance on the gold sector. We remain cautious on the (x) platinum sector, given the optimistic cash flow assumptions that the market appears to be MSCI South Africa 12M fwd P/E (x) MSCI EM 12M fwd P/E (x) pricing in; our belief that supply/demand fundamentals could remain unfavourable over the MSCI SA ex Naspers 12M fwd P/E (x) medium term; and negative earnings momentum if spot prices prevail. The platinum miners 18 seem expensive to us based on near-term valuation multiples. 16 14 The SA food/drug retailers have outperformed SA general retailers (discretionary 12 retailers) YtD by 17.5%, largely due to concerns around the weakness in the SA 10 consumer post a renewed weakening of the USD/ZAR from March 2017 and poor national retail sales in 2017 (real retail sales contracted in January and February). Whilst 8
consumer confidence recovered through 2016 thanks to a strengthening rand, we have
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 seen this trend reverse strongly in 1Q17 as political uncertainty and a firmer dollar have Jan-10 Source: MSCI, Bloomberg taken the shine off a potential substantial disinflation trade for SA retailers in 2017. With
27 Renaissance Capital 12 June 2017
The Focal Point
political turbulence and likely higher levels of inflation than what was predicted a few Figure 44: ZAR vs $, EUR and REER months ago playing out in 2H17, we are still cautious on SA retailers with exposure ZAR vs $ largely focused on the SA consumer (particularly discretionary retailers), and still ZAR vs EUR prefer rand hedge plays. We also suggest holding defensive retail pharmacy plays as S Africa REER (Dec 07 = 100). RHS portfolio insurance in a still-uncertain consumer outlook for the remainder of 2017. 20 60 18 16 80 14 For industrials, the start to 2017 has been a little more volatile, affected by the following 12 factors: 1) a volatile rand, which affects those stocks with FX-denominated earnings; 2) 10 100 8 uncertain local economic growth, which affects the transport and packaging industries; 3) 6 120 volatile commodity prices, which affects Grindrod, Bidvest, Imperial, Super Group and 4 2 140 Barloworld; 4) FX restrictions (Nampak in Nigeria and Angola); 5) structural industry
changes (for example, the SA paper packaging market affecting Mpact); and 6)
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 aggressive tendering in a range of markets. Although the environment remains tough, we Jan-95 Source: IMF, Bruegel, Bloomberg believe that generally balance sheets remain sound, with reasonably robust cash generation. As some of their trading environments have deteriorated, many of the Figure 45: MSCI South Africa and EM 12M fwd industrial companies under our coverage have been quick to reduce costs and improve P/E (x) by sector efficiencies in order to remain competitive. South Africa EM 25 In financials, SA bank growth is slowing due to the weak economy, and prospects are 20 turning poorer post the sovereign downgrade to sub-investment grade. While we still 15 expect positive earnings growth in 2017, the dominance of the big banks in the local 10 market will mean escaping market weakness is unlikely. While we have seen no immediate financial repercussions of the downgrade, we are wary of the potential for 5 funding costs to rise and currency volatility to return. We are also cautious due to the 0
potential for further political difficulties, and politically-motivated banking regulation. As a Overall
result, we prefer counters that have offshore exposure, such as Investec with Energy
Materials
Telecoms
Financials
Industrials
Cons. Disc Cons. Healthcare around a third of revenues earned offshore. We still like FirstRand as a best-in- Estate Real Cons. Staples Cons. class, stable play, but the contribution of its offshore earnings is far lower. Source: MSCI, Bloomberg
In insurance, we are structurally bearish about SA life insurers because we expect Figure 46: Net % of funds over/underweight competition from non-life companies, regulatory changes and consumer trends to South Africa continue to lead to policyholder AuM growth that falls short of the SA savings industry South Africa 100% AuM growth, and we also expect margins to continue to reduce relative to assets. In the short term, there could be a recovery in Liberty Holding’s trading level given its sensitivity 50% to markets and its conservative provisioning at 31 December.
0% South Africa is trading on 14.5x 12M FWD P/E well above its 10-year average of 12.4x. Earnings growth for 2017 is middling at 13% for 2017E, though this will accelerate to 19% -50% over 2018, though EPS forecasts have fallen 2% over the past three months. The
revisions ratio is among the worst in EMEA after Russia. -100%
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Among the stocks in our coverage, we highlight: Naspers, Steinhoff, Anglo American, Jan-00
Sanlam, Mediclinic, Anglo American Plat., Woolworths, Exxaro, Santam, Coronation, Source: MSCI, EPFR
DisChem, Grindrod, and Rhodes Food (see page 50 for target prices and ratings).
28 Renaissance Capital Turkey 12 June 2017
OVERWEIGHT The Focal Point
The government is using its balance sheet to support credit growth – via guarantees Valuations which have helped push FX-adjusted lending growth towards 30%. This, combined with Current 6M prior 5Y avg 10Y avg lower political uncertainty, should sustain GDP growth of at least 2-3% in 2017, we 12M fwd P/E 8.4 7.4 9.3 9 Vs EM -32% -35% -15% -19% believe (rebounding from -1.8% in 3Q17). Coupled with a mildly undervalued currency, we S-N* P/E 9.3 8.4 think this means investors can find value in Turkey for now. Banks are likely to beat *S-N = Sector adjusted Source: Bloomberg, Renaissance Capital market expectation of 5% EPS growth this year as asset quality is much healthier than market expectations and volumes are outpacing management guidance. President Recep Positioning Tayyip Erdogan and Prime Minister Binali Yildirim have suggested no snap election, Current 6M prior 5Y avg 10Y avg giving Turkey a potential window for some political normalisation after four years of Positioning 0.6% 0.7% 1.0% 1.2% elections and a coup – with the next elections not due until 2019’s local (March) and vs EM Source: Bloomberg, Renaissance Capital general (November) elections. We would see any lifting of the state of emergency (which was extended post referendum for a further three months) as a key positive signal to Earnings watch for. A more pro-business stance would likely boost investment and create Net +ve Forecast Growth employment ahead of the 2019 elections, and would be a positive surprise for the market. 3M revisions chg (3M) 2017 EPS 17.6% 30.7% 9.0% Turkey’s PMI has been on an improving trend since January, broke through 50 in March 2018 EPS 13.5% 35.1% 8.8% and is currently 53.5. April’s inflation was 11.7% (down from 11.9% in April, but up from Source: Bloomberg, Renaissance Capital just 7% in November). Provided the currency remains stable, a decline during 2H17 look Dividends likely, with consensus expecting 9.3% by year end, taking pressure off the central bank to Current Rank in EM tighten liquidity. Rebasing of national accounts have improved deficit/GDP and debt/GDP 12M fwd dividend yield 3.6 7 ratios, but nevertheless, Deputy PM Mehmet Simsek has suggested the current account Source: Bloomberg, Renaissance Capital deficit could be a bit above 4% in 2017; the IMF expects 4.7%, implying Turkey’s current account issues have yet to be addressed despite low oil prices. Fiscal stimulus is FX REER % over/under expected to see the budget deficit hit 3% of GDP in 2017 (up from 2.3% in 2016) but Spot become less important as domestic demand recovers. The lira is close to fair value (just fair value fair value 3% cheap) on our 20-year REER model. FX valuation 3.53 3.43 -2.8% Source: IMF, Bruegel, Bloomberg, Renaissance Capital
Our constructive view on Turkey is only tactical, however. Our political longevity piece of Figure 47: Foreign ownership of Turkish equities August 2013 (Directional economics: The problem with political longevity) found that a Turkey foreign ownership in equities, % leader being in power for much more than 10 years is consistent with a weakening of the 10-yr average foreign ownership % political opposition, worsening corruption and therefore greater headwinds to equity 75% investors (but does not necessarily have an impact on FDI). Despite Turkey being 70% perceived by many investors as a strong growth story, dollar GDP per capita has 65% stagnated for a decade: we believe the country may be suffering symptoms of the middle- income trap – with the solution unlikely to be found in great political centralisation. We 60% emphasised that excessive credit growth is Turkey’s key macro vulnerability in our May 55% 2015 report Reform awakens. Private sector debt rose from 16% of GDP in 2001 to 69% 50% of GDP in 2016, echoing what we have seen in Greece and Brazil. This is likely to end
badly, in our view, just not yet. Jul-06
Oct-09 Apr-16
Jun-05 Jan-13
Feb-14 Mar-15
Nov-10 Dec-11
Aug-07 Sep-08 May-04 Source: MKK We are selective in consumer and industrials as large parts of the non-financial sectors are trading on relatively full valuations. We also see potential for upside in financials in the Figure 48: Net % of funds over/underweight second half, assuming a disinflation story plays out later in the year; currently we are still Turkey cautious. We like Sabanci Holding, Coca-Cola Icecek, Ulker Biskuvi, Yatas, Ulusoy 100% Elektrik, and Lokman Hekim (See page 50 for target prices and ratings). 80% 60% Turkey is the second-cheapest market in MSCI EM on a 12M FWD P/E basis after Russia 40% 20% (and third cheapest on a sector-adjusted basis); the fourth-cheapest market in EMEA vs 0% its 10-year average 12M FWD P/E (and one of only eight countries in MSCI EM trading -20% below its 10-year average 12M FWD P/E). Turkey is the fourth most overweight market -40% among active managers in MSCI EM countries. Turkey has the highest 2017 three-month -60% EPS revisions ratio in MSCI EM. -80%
-100%
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-00 Source: MSCI, EPFR
29 Renaissance Capital Egypt 12 June 2017
NEUTRAL The Focal Point
Feedback from our recent Egypt conference was that corporates have raised blue-collar Valuations wages by 20-30% (1x the IMF’s inflation forecast for 2017) and white-collar salaries by up Current 6M prior 5Y avg 10Y avg to 15% (up to 0.5x the inflation forecast). To us, this likely indicates that lower-paid 12M fwd P/E 11.9 9.4 10.2 9.6 households, many of which receive food subsidies, may be able to adjust to Egypt’s new Vs EM -3% -11% -8% -14% normal faster than the middle- to upper-middle class, who we think will likely trade down. S-N* P/E 14.6 10.3 *S-N = Sector adjusted Most corporates (except for property developers, who have reported strong YtD sales) are Note: Valuations are for MSCI Egypt all-cap, except sector-neutral P/E witnessing a decline in volumes. For banks, we think this may imply softer loan growth Source: Bloomberg, Renaissance Capital and lower fee income. Several corporates are exploring M&A domestically and within Africa/GCC. The 200-bpt rate hike to 16.75% is currency supportive in our view, and Positioning Current 6M prior 5Y avg 10Y avg shows a commitment to getting inflation back down again, after months where inflation Positioning vs EM 0.0% 0.0% 0.1% 0.2% has consistently been running high – as well as attracting capital inflows. May’s inflation Source: Bloomberg, Renaissance Capital data was the first month in seven of food price inflation falling below 3.0% MoM. As food represents 40% of the CPI basket, it is an inflation and a social problem. Earnings Net +ve Forecast Growth Egypt’s Zohr gas field is well on track, according to several companies, and should start 3M revisions chg (3M) production by the end of 2017, ramp up in 2018, and reach steady-state production by 2017 EPS 26.6% -3.3% -0.9% 2019. Zohr, in addition to Qalaa Holding’s new refinery, should help to significantly 2018 EPS 23.0% -12.9% 6.7% Source: Bloomberg, Renaissance Capital reduce Egypt’s hefty energy import bill by 2019, in our view. Natural gas supply to industrial companies has improved and continues to pick up, indicating that plant Dividends utilisation rates should be on an upward trajectory. Natural gas pricing deregulation is Current Rank in EM under way and may lead to sectors such as steel and cement paying much lower prices 12M fwd dividend yield 2.1 19 than they currently do. Source: Bloomberg, Renaissance Capital
The Egyptian pound is the cheapest in EM and Africa. There is an already demonstrated FX REER % over/under commitment to tough fiscal reform, such as energy subsidy removal, with external backing Spot fair value fair value from the IMF. And a decade of bank deleveraging means Egypt has huge potential for FX valuation 18.1 12.9 -28.7% credit growth when rates fall. High interest rates are attracting portfolio inflows, and we Source: IMF, Bruegel, Bloomberg, Renaissance Capital see room for credit rating upgrades from 2H17 or beyond. Finally, we see Egypt is relatively insulated from a US recession or a US-China trade war, and that political risks Figure 49: EGP vs $, EUR and REER are priced in to FX and bonds. Currency stability – which should be supported by the EGP vs $ higher interest rate – will help drive down MoM inflation. Any appreciation of the currency EGP vs EUR Egypt REER (Dec 07 = 100). RHS could help more: the Egyptian pound remains the cheapest currency in EM based on our 20 60 December 2016 REER model update. Even taking inflation into account, we still assume 18 16 fair value for the currency is around EGP14-15/$, and the spot rate of EGP18/$ is 14 110 therefore cheap. 12 10 8 160 In January, we took the view that GDP would be weaker than the IMF (4%) or consensus 6 4 (then 4%, now 3.4%) expected in 2017, and we stick with our view that 3% growth is more 2 210
likely, lifted by net exports and a little investment, and kept low by 1% private
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17 consumption growth (which is less than population growth). We see potential for earnings Jan-95 to undershoot consensus in 2017 – an investment in Egypt at this point needs to be on Source: IMF, Bruegel, Bloomberg the basis of a 2018 recovery. Figure 50: MSCI Egypt (all cap) and EGX30 vs The MSCI Egypt All-Cap index (more representative than the stock MSCI Egypt index, MSCI EM, 12M fwd P/E (x) MSCI Egypt 12M fwd P/E (x) and trades similarly to the EGX30 index) is up 31% in dollar terms since the November MSCI EM 12M fwd P/E (x) devaluation lows and is trading on a 12M FWD P/E of 11.9x. Further progress will require EGX30 12M fwd P/E (x) 16 signs of inflation coming down, allowing the central bank to cut rates before end-2017. 14 12 Our top picks in Egypt include: Eastern Tobacco, El Sewedy Electric, Egypt Telecom, Credit Agricole Egypt, Palm Hills Developments, SODIC, and GB Auto (see page 50 for 10 target prices and ratings). 8 6
4
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg
30 Renaissance Capital UAE 12 June 2017
UNDERWEIGHT The Focal Point
1Q17 bank results highlighted resilient asset quality, with overall CoR down by 20 bpts on Valuations average QoQ for the banks under our coverage and flat across the sector. While we note Current 6M prior 5Y avg 10Y avg the risk from the subdued consumer environment and expect an increase in impairments, 12M fwd P/E 10.8 11.0 12.9 10.8 we believe provision coverage is strong. We expect a pick-up in loan growth on project Vs EM -12% -2% 17% -3% awards, higher tourist numbers and hotel occupancy rates and better trade activity. We S-N* P/E 12.2 12.4 *S-N = Sector adjusted forecast FY17E loan growth of 9%, led by Dubai Islamic Bank’s 16%. Source: Bloomberg, Renaissance Capital
May’s PMI (which measures activity in the non-oil economy) was 54.3, down from April’s Positioning 56.1 PMI reading. The Dubai economy tracker hit 57.7 in April, the highest reading since Current 6M prior 5Y avg 10Y avg April 2015. But companies reported caution over increasing employment. And overall Positioning vs EM -0.4% -0.5% -0.5%* -0.5%* *From date of index inclusion (May 2014) economic growth is likely to be constrained in 2017 by Abu Dhabi’s implementation of Source: Bloomberg, Renaissance Capital OPEC production cuts. Earnings It looks as though the government’s overall 3.5-4.0% growth target will be difficult to Net +ve Forecast Growth achieve: the IMF expects just 1.5% in 2017 (a slowdown from 2.7% given the impact of 3M revisions chg (3M) OPEC production cuts) but rebounding to 4.4% in 2018. The IMF expects non-oil GDP 2017 EPS 1.5% 4.3% -0.5% growth to accelerate from 2.7% in 2016 to 3.8% in 2017, but oil GDP to slow from 2.8% to 2018 EPS 9.5% -1.1% 2.2% Source: Bloomberg, Renaissance Capital -3.7%. Dubai tourist arrivals were up 11.2% YoY in 1Q17. The IMF calculates 2017 fiscal breakeven at $67/bl, leading to a non-worrying budget deficit of 2.6% of GDP in 2016, Dividends 0.6% in 2017. Current Rank in EM 12M fwd dividend yield 4.3 3 Property agents Cluttons noted that freehold residential price declines continued in to Source: Bloomberg, Renaissance Capital 1Q17 albeit at a slowing pace: -7.8% YoY at end-March from -8.8% at end-2016 (the worst annual performance in five years). The top end remains particularly weak. Property FX REER % over/under prices are 28.7% below their 3Q08 peak, with a further 5% decline in prices is anticipated Spot fair value fair value before the market stabilises. Redundancies in oil & gas and banking saw rents fall 9.9% in FX valuation 3.67 4.33 18.0% 2016, and 1Q17 has seen a 4.7% further decline, with an additional 5-7% expected over Source: IMF, Bruegel, Bloomberg, Renaissance Capital the next six months, with the weakness concentrated in villas. In the commercial sector, VAT uncertainty and subdued corporate demand has begun to impact the resilience of Figure 51: MSCI UAE vs MSCI EM, performance rents, resulting in a marginal decline in headline rents. Meanwhile JLL reports that with MSCI UAE ($) MSCI EM ($) relaxed visa requirements (to achieve the targeted 20mn visitors by 2020) saw hotel 300 occupancy reach 86% in the first two months of 2017 (vs 83% in the same period of 2016). Average daily rates however continued to slip, at $221 (vs $233). Strong upcoming 250 supply in the sector is expected to keep both occupancy and rates under pressure. Dubai 200 Land Department figures show a 45% increase in YoY transaction values in 1Q17, 150 suggesting increased transactions at current valuations. 100
Our five-factor model looks for stronger performance from UAE equities heading in to 50
2018 as growth picks up.
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Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg Among our UAE coverage, we highlight Abu Dhabi Comm. Bk., and Dubai Islamic Bank (see page 50 for target prices and ratings). Figure 52: MSCI UAE vs MSCI EM, 12M fwd P/E (x) . MSCI UAE 12M fwd P/E (x) MSCI EM 12M fwd P/E (x) 24 22 20 18 16 14 12 10 8 6
4
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31 Renaissance Capital Qatar 12 June 2017
UNDERWEIGHT The Focal Point
Qatar’s fiscal breakeven of $53/bl is not far off current prices, and is the second lowest in Valuations the GCC (after Kuwait). The IMF expects a budget deficit of just 3.1% of GDP in 2017, Current 6M prior 5Y avg 10Y avg 0.6% of GDP in 2018. Qatar unexpectedly decided to lift its 2005 moratorium on north 12M fwd P/E 11.7 11.9 12.5 11.8 field gas export projects (following the ramp-up of Iran’s volumes from South Pars – the Vs EM -4% 7% 13% 8% same field – to match those of Qatar). With scope for an additional 10% of current output, S-N* P/E 14.0 15.0 *S-N = Sector adjusted mainly from the southern part of the field, this could boost growth from 2022 onwards, Source: Bloomberg, Renaissance Capital given the five- to seven-year lead time, but would be a step back for Qatar’s plans to diversify the economy. Positioning Current 6M prior 5Y avg 10Y avg Finance Minister Ali Al Emadi commented that oil prices in excess of $45/bl have relieved Positioning vs EM -0.7% -0.7% -0.7%* -0.7%* *From date of index inclusion (May 2014) pressure on the budget, and that plans continue to invest $200bn in infrastructure Source: Bloomberg, Renaissance Capital upgrades ahead of the 2022 World Cup (Qatar is currently investing $500mn a week). 48% of Qatar’s budget is public investment related, and the operating budget of $30bn Earnings can be financed even with sub-$30/bl oil. Almost 90% of projects related to the World Cup Net +ve Forecast Growth have been awarded (including highways, railways and hospitals) with two-thirds to be 3M revisions chg (3M) completed by 2020. The government has awarded more than $8bn of projects to private 2017 EPS 8.0% -19.0% -2.6% companies to help develop the private sector. Qatar is planning to invest $35bn in the US 2018 EPS 14.0% -24.6% -2.2% Source: Bloomberg, Renaissance Capital by 2020 (60% has been deployed already, and has recently invested into Russia’s Rosneft, UK’s National Grid, Turkey’s biggest poultry producer and has applied for Dividends permission to boost its stake in Deutsche Bank. Current Rank in EM 12M fwd dividend yield 4.1 4 The IMF expects GDP growth to rebound from 2.7% in 2016 to 3.4% in 2017, however Source: Bloomberg, Renaissance Capital the delayed ramp-up of the $10bn Barzan natural gas development risks the rebound being pushed out to 2018. The IMF expects non-oil GDP growth to slow from 6.5% in FX REER % over/under 2016 to 5.7% in 2017, and oil GDP to pick up from -0.9% in 2016 to 1.1% in 2017. We Spot fair value fair value see Qatar’s low oil price breakeven and support from World Cup-related capex as making FX valuation 3.65 4.46 22.2% the market low beta to fluctuations in oil. Source: IMF, Bruegel, Bloomberg, Renaissance Capital
The recent disagreement between Qatar and Saudi Arabia, Egypt, Bahrain and the UAE Figure 53: MSCI Qatar vs MSCI EM, performance which has resulted in the severing of air and sea transport links with Qatar as well as the return of resident nationals and the closure of Qatar’s only land border (with Saudi MSCI Qatar ($) MSCI EM ($) 250 Arabia). Given Qatar’s exports are overwhelmingly energy related, the direct impact on trade is likely to be limited (gulf sea lanes are still open). However, the banking sector is 200 worth watching: QNB has around 210 branches in Egypt and 27 in the UAE, while CBQ has a 40% shareholding in the UAE’s United Arab Bank. 45% of deposits in the Qatari 150 banks come from non-residents. 100
Among the stocks under our coverage, we highlight Ooredoo. 50
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Figure 54: MSCI Qatar vs MSCI EM, 12M fwd P/E (x) MSCI Qatar 12M fwd P/E (x) MSCI EM 12M fwd P/E (x) 20 18 16 14 12 10 8 6
4
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32 Renaissance Capital Greece 12 June 2017
NEUTRAL The Focal Point
Greek government debt (though only lightly traded) has seen 10-year yields come down Valuations from 7.8% in February to a low of 5.6% in May before rebounding to 6% by end-May as Current 6M prior 5Y avg 10Y avg good progress on the primary surplus (4.2% of GDP in 2016, well ahead of the 0.5% of 12M fwd P/E 23.1 20.7 18.2 13.6 GDP target) combined with hopes of an agreement with lenders to release further Vs EM 89% 76% 64% 22% tranches of funding ahead of a July repayment. S-N* P/E 12.1 11.0 *S-N = Sector adjusted Source: Bloomberg, Renaissance Capital 18 May saw the Greek parliament pass a package of pension cuts (for the 13th time since 2010), energy sector liberalisation, lower income tax thresholds and more liberal Sunday Positioning trading. However, the 22 May Eurogroup concluded without agreement given Current 6M prior 5Y avg 10Y avg disagreements over growth and fiscal projections, postponing a decision until the next Positioning vs EM -0.1% -0.1% -0.1%* -0.1%* meeting on 15 June. *From date of re-inclusion (November 2013) Source: Bloomberg, Renaissance Capital
At the centre of the dispute is the IMF’s view that Greece’s debt burden is unsustainable, Earnings and there needs to be debt relief before it can take part in any new programme. Germany Net +ve Forecast Growth requires IMF participation as an independent third party in any agreement, as does the 3M revisions chg (3M) ECB for any inclusion of Greece in its QE programme. One solution to the impasse could 2017 EPS -1.7% -10.4% -11.4% be a proposal, reportedly put forward by the IMF, where the fund would join the bailout, 2018 EPS 57.8% -0.6% -5.5% but not provide funding until details of easing Greece’s debt burden are agreed Source: Bloomberg, Renaissance Capital (something that is politically challenging to complete ahead of Germany’s September Dividends elections). Greece’s current programme ends in 2018, which could pave the way for more Current Rank in EM serious discussion on debt relief. The ECB also needs to see medium-term measures on 12M fwd dividend yield 1.7 22 debt sustainability (in practice, debt relief) in order to include Greek government debt in its Source: Bloomberg, Renaissance Capital QE programme. FX REER % over/under The IMF expects growth to rebound from 0% in 2016 to 2.2% in 2017. Consensus is more Spot bearish, expecting 0.9% GDP growth for 2017, however 1Q17 growth came in at -0.1% fair value fair value FX valuation 1.12 1.10 -2.2% QoQ, -0.5% YoY. Domestic demand remains weak, with the labour market still soft, and as Source: IMF, Bruegel, Bloomberg, Renaissance Capital ongoing bailout negotiations (and rise in fiscal burden for corporates) impacts investments.
Figure 55: 10-year bond yield, % The Syriza coalition has 153 seats in (the 300 seat) parliament. Fourteen of 15 opinion polls in 2017 have given the opposition centre-right New Democracy party a double-digit Greece 10yr Govt. yld. (%) 40 lead over Syriza. 30 The potential for a further decline in bond yields if an interim agreement is made in June bodes well for short-term upside for Greek assets, but a manufacturing PMI still sub-50 20 (49.6 in May, up from 48.2 in April) suggests a return to growth will take time. At just 0.4% 10 of MSCI EM many investors choose to ignore Greece given the volatility. We are happy to stay neutral, given the unpredictability of EU negotiations, though we believe that Brexit if 0
anything is likely to make the EU more accommodative towards Greece’s position.
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Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg If bottom-up forecasts are to be believed, Greece has the highest expected 2017 and 2018 EPS growth forecasts in MSCI EM (from a low base); however, looking at earnings excluding negative to positive swings (our preferred EPS growth measure) shows a small Figure 56: MSCI Greece vs MSCI EM, contraction over 2017 but strong recovery in 2018. performance
MSCI Greece ($) MSCI EM ($) 140 120 100 80 60 40 20
0
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33 Renaissance Capital Czech 12 June 2017
NEUTRAL The Focal Point
April’s long-awaited floating of the Czech koruna appears to have been a non-event, with Valuations the currency rallying by just 2% against the euro (inflows of $65bn into local assets had Current 6M prior 5Y avg 10Y avg already preceded the move). Exporters have had plenty of time to prepare for a float 12M fwd P/E 14.5 13.7 12.4 12.0 which should limit any economic impact. The Czech National Bank’s (CNB) chief Vs EM 18% 19% 12% 7.3% economist has suggested that a 1% appreciation of the koruna delivers a similar degree S-N* P/E 12.0 8.8 *S-N = Sector adjusted of tightening to a 25-bpt interest rate increase. Source: Bloomberg, Renaissance Capital
The Czech economy continues its steady growth, while inflation has returned to the Positioning central bank’s 2% target after undershooting for three years. The IMF expects growth to Current 6M prior 5Y avg 10Y avg accelerate from 2.4% in 2016 to 2.8% in 2017 – the pick-up in growth being driven by an Positioning vs EM 0.0% 0.0% -0.1% -0.2% increase in EU fund absorption (which spiked in 2015 before slumping in 2016 as EU Source: Bloomberg, Renaissance Capital funding transitioned between budgetary periods). 1Q GDP grew by 2.9% YoY (up from 1.9% YoY in 4Q16). In 2017, domestic demand is expected to be the main contributor to Earnings Net +ve Forecast growth, supported by accelerating wage growth and consumer confidence indicators near Growth 3M revisions chg (3M) all-time highs; retail sales were up 6.4% in 1Q (10.1% in March). The CNB has reduced 2017 EPS -11.7% 14.3% 1.5% its 3Q18 CPI forecast to 2.0% from 2.1%, raised its 2017 GDP forecast to 2.9% (from 2018 EPS -1.0% 2.2% -1.3% 2.8%) while maintaining its 2.8% 2018 forecast. The CNB assumes a hike in rates in Source: Bloomberg, Renaissance Capital 3Q17 and later in 2018. Dividends May’s manufacturing PMI dipped slightly to a still strong 56.4 (a 10th month of Current Rank in EM expansion). New export work expanded at the second highest rate since January 2015 as 12M fwd dividend yield 5.9 2 Source: Bloomberg, Renaissance Capital demand from Europe and specifically Germany picked up. Survey evidence suggested labour shortages within the economy are becoming a constraint on growth. The Czech FX Republic’s European Commission Economic Sentiment indicator was 106.9 in May – still REER % over/under Spot strong, but down from 107.4 in April and from a peak of 109.4 in November. fair value fair value FX valuation 23.4 28.8 23.1% Source: IMF, Bruegel, Bloomberg, Renaissance Capital Social Democrat (CSSD) Prime Minister Bohuslav Sobotka has ousted junior coalition partner ANO’s leader and Finance Minister Andrej Babis from the government ahead of Figure 57: CZK vs EUR the 20-21 October general election. May opinion polls put junior coalition party ANO ahead in the polls at around 30% vs 13% for the Social Democrats. It is likely that the CZK vs EUR current coalition continues post-election, but led by ANO with CSSD as a junior partner 29 perhaps under fresh leadership. 28 27 Market EPS growth is expected to be negative in 2017; MSCI Czech Republic has the 26 second-highest dividend yield of any country in MSCI EM. 25 24 A lack of interesting stocks keeps us neutral despite the rebounding economy. 23
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Figure 58: Eurozone, Czech manufacturing PMIs Eurozone Mfg. SA Czech Republic Mfg. SA 60 58 56 54 52 50 48 46
44
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34 Renaissance Capital Hungary 12 June 2017
OVERWEIGHT The Focal Point
Economic growth slowed to 2.0% in 2016 (due to lower absorption of EU funds given the Valuations transition of EU funding periods which saw investment fall by 15.5% in 2016), but should Current 6M prior 5Y avg 10Y avg rebound in 2017, driven by both consumption and investment: the IMF expects 2.9% 12M fwd P/E 11.4 11.3 10.1 9.6 Vs EM -7% 1% -10% -15% growth; the European Commission 3.6%. S-N* P/E 14.0 13.4 *S-N = Sector adjusted We expect increased EU-fund absorption and public infrastructure investment to support Source: Bloomberg, Renaissance Capital growth, alongside capacity upgrades in manufacturing; the tightening labour market and rising wages (including the minimum wage) are expected to boost domestic consumption. Positioning May’s PMI surged to 62.1, an all-time high, up from 56.2 in April. Hungary’s European Current 6M prior 5Y avg 10Y avg Positioning vs EM 0.3% 0.3% 0.3% 0.3% Commission Economic Sentiment indicator hit 117.1, an all-time high in May (up from Source: Bloomberg, Renaissance Capital 115.7 in April). Earnings With elections due in April 2018, we think fiscal expenditure should be growth positive in Net +ve Forecast Growth 2018, but risks of populist pre-election policy ‘announcements’ remain. Recent opinion 3M revisions chg (3M) polls put the incumbent Fidesz (46% on average in the last five polls, eliminating 2017 EPS -3.9% 27.8% 5.1% undecideds) well ahead of far-right Jobbik (19%) and socialists MSZP (19%). Tensions 2018 EPS 5.2% 11.8% 0.2% Source: Bloomberg, Renaissance Capital with the EU are likely to continue related to asylum policy and broader civil society issues. However, the budget deficit in 2017 (2.6% of GDP according to the IMF) looks set to Dividends come in below the EU limit, and the currency account should remain in surplus (3.7% of Current Rank in EM GDP according to the IMF). 12M fwd dividend yield 2.6 15 Source: Bloomberg, Renaissance Capital With OTP now trading on 1.5x book value on a 12M FWD basis (for 14% RoE), we suspect most of the market’s rerating is behind us, though 10-year local currency bond FX REER % over/under yields are just 3.0% the growth rebound is a positive one for 2017, and there is a potential Spot fair value fair value re-leveraging story to come (credit to GDP is just 37% of GDP by our calculations). FX valuation 275 302 9.8% Consensus market EPS growth to be very slightly negative in 2017; that said, Hungary Source: IMF, Bruegel, Bloomberg, Renaissance Capital has the second-highest 2017 three-month EPS revisions ratio in MSCI EM. Figure 59: MSCI Hungary vs MSCI EM, 12M fwd P/E (x) MSCI Hungary 12M fwd P/E (x) MSCI EM 12M fwd P/E (x) 15 14 13 12 11 10 9 8 7 6
5
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Figure 60: Eurozone, Hungary manufacturing PMIs Eurozone Mfg. SA Hungary Mfg. SA 62 60 58 56 54 52 50 48 46
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35 Renaissance Capital Poland 12 June 2017
The Focal Point OVERWEIGHT
Polish equities have surprised the market YtD as the top-performing market in MSCI EM, Valuations up 32% in dollar terms. The market has priced in a rebounding economy in 2017, a return Current 6M prior 5Y avg 10Y avg to positive inflation (and less margin pressure on the banks) as well as government 12M fwd P/E 12.4 11.6 12.4 11.8 policies proving to be less market unfriendly than had been feared – for example, recent Vs EM 1% 0% 12% 6% signs of politicians’ rhetoric easing on a blanket conversion of Swiss loans in past months S-N* P/E 14.6 15.3 *S-N = Sector adjusted in favour of a negotiated outcome and/or individual court settlements. Despite the strong Source: Bloomberg, Renaissance Capital performance, Poland has made up only one-third of the market’s underperformance vs MSCI EM since March 2014, and just half of the underperformance since September Positioning 2015 (when the market began to price in a PiS election victory that November). Current 6M prior 5Y avg 10Y avg Positioning vs EM -0.5% -0.3% -0.6% -0.6% Active managers of MSCI EM benchmarked funds are still underweight Poland – which Source: Bloomberg, Renaissance Capital continued signs of a Eurozone recovery could cause investors to close. Poland’s 2017 three-month EPS revisions ratio is positive. Polish mutual funds have been net buyers of Earnings Net +ve Forecast the market for three of the first four months of the year. With MSCI Poland now trading on Growth 3M revisions chg (3M) a 12M FWD P/E of 12.4x, Poland is trading above its five-year but below its 10-year 2017 EPS 24.5% 2.4% 2.6% average and at a slight discount to MSCI EM. Having re-rated from 10.6x in late 2015, we 2018 EPS 4.8% 2.9% 2.5% suspect that most of the P/E re-rating is behind us. Over the past decade, Poland has Source: Bloomberg, Renaissance Capital averaged a 6% premium to MSCI EM; at present the premium is 1%. Dividends The economy lost momentum in 2H16, slowing to 2.7% for 2016. The IMF expects a Current Rank in EM decent growth rebound in 2017, to 3.4%, and 1Q17 GDP growth has rebounded strongly 12M fwd dividend yield 2.7 13 Source: Bloomberg, Renaissance Capital to 4% YoY (up from 2.5% in 4Q16). We expect domestic consumption to be a key driver – the ‘500+’ programme should continue to boost incomes during 1H and the tightening FX labour market should result in faster wage growth. Recovering EU transfers plus strong REER % over/under Spot Eurozone PMI data point to investment and exports picking up over the course of the fair value fair value year. Inflation returned in to positive territory in November (after 28 months of deflation) FX valuation 3.74 3.98 6.4% and hit 2% in April (the IMF anticipates 2.3% by end-year). Consensus anticipates a first Source: IMF, Bruegel, Bloomberg, Renaissance Capital rate hike in 2Q18. Figure 61: MSCI Poland vs MSCI EM, 12M fwd P/E (x) Poland’s manufacturing PMI print for May of 52.7 remains well into positive territory and MSCI Poland 12M fwd P/E (x) Poland’s European Commission Economic Sentiment indicator was 102.9 in May, not far MSCI EM 12M fwd P/E (x) off April’s 103.8, an eight-year high. After nationalising $39bn of private pension fund 16 assets in 2014, the government plans to transfer 25% of pension savings collected in the 14 once mandatory OFE pensions to the state’s Demographic Reserve Fund, converting the 12 remainder into private investment funds, with a choice of risk levels, potentially restricting outflows and making future inflows voluntary. Those funds could be gradually shifted into 10 government bonds, though details are only expected to be finalised around mid-year. 8
6
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Figure 62: Eurozone, Poland manufacturing PMIs Eurozone Mfg. SA Poland Mfg. SA 60 58 56 54 52 50 48 46
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36 Renaissance Capital Saudi Arabia 12 June 2017
The Focal Point UNDERWEIGHT
The government has been pushing forward market infrastructure improvements, including Valuations t+2 trading and the ability (albeit yet untested) to borrow stock to short sell. A programme Current 6M prior 5Y avg 10Y avg is being implemented to upgrade the IR function at the 24 Tadawul companies with the 12M fwd P/E 13.0 13.5 12.6 12.5 most international exposure; the Nomu parallel market has been introduced. However, Vs FM 15% 19% 14% 14% S-N* P/E 13.6 13.4 progress on attracting foreign investors has been slow so far: just 60 QFI investors are *S-N = Sector adjusted registered and QFI ownership is just 0.3%, with foreigners owning c. 4% of Saudi shares Source: Bloomberg, Renaissance Capital (including indirectly). Positioning Saudi Arabia is targeting inclusion in MSCI EM, and has been implementing Current 6M prior 5Y avg 10Y avg improvements to the QFI regulations as well as introducing t+2 settlement and the ability Positioning vs FM 4.9% 4.5% 5.8% na to short-sell. The next MSCI review round takes place from June 2017-June 2018. If Positioning vs EM 0.2% 0.2% 0.2% 0.2% Source: Bloomberg, Renaissance Capital Saudi Arabia is included in this review cycle (we’ll find out on 20 June), an announcement would be due in June 2018 – if successful, that could mean inclusion in MSCI EM in Earnings November 2018 or (more likely) May 2019 – which would coincide with the expected Net +ve Forecast Growth timeline for the Saudi Aramco IPO. 3M revisions chg (3M) 2017 EPS 7.2% 1.2% 1.4% By our calculations, Saudi Arabia would have a weight of 2.4% in MSCI EM. Adding Saudi 2018 EPS 11.3% -5.3% 1.2% Source: Bloomberg, Renaissance Capital Aramco could in theory boost the weight by 1-2% depending on how much is sold (5% is generally expected) and at what market capitalisation (initial expectations of a $2trn potential Dividends market cap have been scaled back of late with a $0.8-1.1bn range looking more likely). Current Rank in FM 12M fwd dividend yield 3.9 16 The Saudi Tadawul index is currently trading on 13.0x 12M FWD earnings, a slight Source: Bloomberg, Renaissance Capital premium to the 12.6x five-year average. Given ongoing pressure to bring down the budget deficit, we see continued headwinds in Saudi Arabia notwithstanding King Salman FX REER % over/under bin Abdulaziz’s decision to restore bonuses and allowances for state employees Spot fair value fair value highlighting the challenges of managing the transition to the next generation of the Saud FX valuation 3.75 4.51 20.3% family, potentially undermining Deputy Crown Prince Mohammed bin Salman’s plans for Source: IMF, Bruegel, Bloomberg, Renaissance Capital reforming the economy and resetting the social contract between government and population during a period of still-low oil prices and regional security challenges. Figure 63: Potential weight of Saudi Arabia in Nevertheless, our view is that there are plenty of low-hanging fruit on the reform side. MSCI EM China (27%) Growth this year looks set to be sluggish given the impact of OPEC production cuts: 0.4% Korea (15%) according to the IMF, down from 1.4% in 2016, with a rebound to 1.3% anticipated in Taiwan (12%) India (8.7%) 2018. Oil GDP is expected to bear the brunt of the slowdown: +3.4% in 2016, -1.9% in Brazil (6.7%) 2017; with the domestic economy more resilient: +0.2% in 2016 and +2.1% in 2017. South Africa (6.6%) Mexico (3.4%) Russia (3.2%) Among the stocks under our coverage, we highlight Al Tayyar Group (see page 50 for Saudi Arabia (2.4%) target price and rating). Indonesia (2.4%) Malaysia (2.3%) Thailand (2.1%) Other (8.0%)
Source: MSCI, Bloomberg
Figure 64: Potential weight of Saudi Arabia in MSCI EM, including Saudi Aramco* China (27%) Korea (15%) Taiwan (12%) India (8.7%) Brazil (6.6%) South Africa (6.6%) Mexico (3.4%) Saudi Arabia (3.3%) Russia (3.2%) Indonesia (2.3%) Malaysia (2.3%) Thailand (2.1%) Other (8.0%)
*Using full company valuation of $881bn and 5% free float Source: MSCI, Bloomberg
37 Renaissance Capital Pakistan 12 June 2017
The Focal Point NEUTRAL
Pakistan’s successful IMF programme brought the budget deficit down from 7.5% of GDP Valuations in 2008 to 4.3% in 2016 and with it bond yields (five-year Pakistan rupee government Current 6M prior 5Y avg 10Y avg bond yields fell from 13% in 2014 to 7% currently). 12M fwd P/E 10.9 9.4 8.4 8.0 Vs FM -4% -10% -25% -28.4% S-N* P/E 12.9 11.3 The economy is accelerating (the IMF expects 5.0% growth in 2017 after 4.7% in 2016), *S-N = Sector adjusted energy availability is improving, companies are investing and FDI is picking up, while the Source: Bloomberg, Renaissance Capital security situation continues to improve. The $46bn (17% of GDP) China-funded CPEC project is bringing in much-needed investment. There is a lot to be positive about with Positioning Pakistan trading on just 11x 12M FWD P/E. Favourable weather suggests a strong winter Current 6M prior 5Y avg 10Y avg wheat crop. Positioning vs FM 2.9% 4.4% 2.7% na Positioning vs EM 0.1% 0.1% 0.1% 0.2% Although Pakistan is trading at close to a 40% 12M FWD P/E premium to its 10-year Source: Bloomberg, Renaissance Capital average, the transition (back) to MSCI EM that took place at the end of May should highlight Pakistan’s valuation discount to India (on 17.4x). Just 12% of MSCI Earnings Net +ve Forecast benchmarked funds have any exposure to Pakistan, and this figure is unchanged vs 6 Growth 3M revisions chg (3M) months ago. The risk is that GEM managers choose to ignore Pakistan at just 0.13% of 2017 EPS 20.3% -26.8% -3.4% MSCI EM. Frontier managers have slashed their overweight from 4.4% to 2.90% over the 2018 EPS 13.0% -13.7% -2.6% past six months. Meanwhile, data from the Karachi Stock Exchange suggests that foreign Source: Bloomberg, Renaissance Capital investors have sold a net $650mn of Pakistan equities since the June 2016 announcement of MSCI EM inclusion. We suspect frontier funds will continue gradually to Dividends trim off index Pakistan (despite many index funds having a high degree of flexibility to Current Rank in FM hold off index countries). 12M fwd dividend yield 5.1 10 Source: Bloomberg, Renaissance Capital We like the Pakistan story, however, we are concerned about the currency which is FX among the most overvalued in frontier on our REER model (after 28% REER appreciation REER % over/under since the beginning of 2014). But we doubt there is appetite for more than a modest Spot fair value fair value weakening of the rupee ahead of the 2018 elections. FX valuation 105 130 23.8% Source: IMF, Bruegel, Bloomberg, Renaissance Capital
Exports are flat on a three-month average YoY basis (an improvement from down 10% this time last year) but imports are up 35% (flat a year ago). The trade deficit is $32bn on Figure 65: Weight of Pakistan in active MSCI EM- benchmarked GEM funds a rolling 12-month basis, up 35% YoY. The current account is also widening, with the IMF 0.30% expecting a more-than-doubling from 1.1% of GDP in 2016 to 2.9% in 2017 (the 10-month FY16/17 current account deficit was $7.3bn, or 2.7% of GDP according to the central 0.25% bank, up from 1% a year ago). FX reserves (ex-gold) have been declining since October’s 0.20% $20.5bn peak, and are now $17.5bn (around four months of trailing imports). Bank 0.15% lending growth has doubled to 20% YoY in April (up from 9% a year previously). With the central bank rate at 6.25%, vigilance will be needed on inflation (core CPI is 5.5%). The 0.10% Finance Minister has estimated a fiscal deficit of 4.2% of GDP for FY17. 0.05%
Inflation has passed its lows and is on the way back up (4.8% in April) vs a low of 1.3% in 0.00%
September 2015; the disinflation bond trade is likely behind us (five-year rupee debt has
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 come down from 13% in 2014 to 7% now); meanwhile the successful completion of the Source: EPFR IMF programme is allowing a back-pedalling on reform (privatisation is suspended pre- election) with risk of pre-election fiscal slippage, and risks ahead of the summer 2018 Figure 66: % of active MSCI EM-benchmarked elections remain. Logic suggests that good progress on economic reform, security GEM funds with allocations to Pakistan improvements, higher growth and better power supply should put Prime Minister Nawaz % of EM funds with allocation to Pakistan Sharif’s PML(N) in a strong position to lead the next government, but there is plenty of scope for pre-election volatility in the run-up. 20%
15%
10%
5%
0%
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: EPFR
38 Renaissance Capital 12 June 2017
The Focal Point
Figure 67: Pakistan vs Frontier vs EM vs India 12M fwd P/E (x)
Pakistan 12M fwd P/E (x) Frontier 12M fwd P/E (x) EM 12M fwd P/E (x) India 12M fwd P/E (x) 20
18
16
14
12
10
8
6
4
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, Bloomberg
39 Renaissance Capital Bangladesh 12 June 2017
OVERWEIGHT The Focal Point
Bangladesh’s high level of investment (approaching 30% of GDP) continues to support Valuations growth of c7%: the IMF expects 6.9% in 2017 and 7.0% in 2018. Increased salaries and Current 6M prior 5Y avg 10Y avg shortfalls on the collection side will impact the fiscal position; however, with a widening of 12M fwd P/E 16.7 16.7 15.0 13.0 the budget deficit from 3.4% of GDP in 2016 to 4.7% in 2017 according to the IMF. The Vs FM 47% 47% 9% 9% government has proposed a 5% of GDP budget deficit for FY18. S-N* P/E 17.7 17.2 *S-N = Sector adjusted Source: Bloomberg, Renaissance Capital Meanwhile the IMF expects the current account to move from a small surplus (0.9% of GDP in 2016) to a small deficit (0.5% of GDP in 2017) driven by falling remittances and Positioning slower exports. Current 6M prior 5Y avg 10Y avg Positioning vs FM 1.3% 1.4% 1.2% na Exports grew by 4.0% in the first nine months of FY17 (to $25.3bn), with growth slowing Source: Bloomberg, Renaissance Capital from 7.7% in the same period a year ago as ready-made garment exports slowed. Imports Earnings rose by 11.6% over the same period (to $32.4bn). Remittance growth has turned Net +ve Forecast Growth negative: -15.7% in the first nine months of FY17 (totalling $9.5bn). 3M revisions chg (3M) 2017 EPS 15.3% 0.0% -1.1% Key infrastructure projects include construction of Padma Bridge connecting the 2018 EPS 13.9% 0.0% -1.1% southwest of Bangladesh with the rest of the country as well as an LNG terminal which Source: Bloomberg, Renaissance Capital should help ease bottlenecks. Bank lending growth is a pretty stable 15-16% (slightly above nominal GDP growth) for the past year (lending is 43% of GDP). The Bangladesh Dividends taka is around 34% overvalued based on our 20-year REER model, but the authorities Current Rank in FM 12M fwd dividend yield na na have been allowing a very gradual depreciation of the currency (by 4% since November Source: Bloomberg, Renaissance Capital 2016) and exports are continuing to grow. FX Bangladesh, trading on 16.7x 12M FWD P/E, is the fourth most expensive market in REER % over/under Spot MSCI FM; that said, we have seen greater interest from investors investing alternates to fair value fair value Pakistan once it leaves the frontier index in June. Bangladesh is the third most overweight FX valuation 80.8 108.0 33.7% Source: IMF, Bruegel, Bloomberg, Renaissance Capital country for actively managed, MSCI Frontier benchmarked funds (after Saudi Arabia and Pakistan). Elections are not due until late 2018-early 2019. Figure 68: MSCI Bangladesh vs MSCI Frontier, $
Figure 70: Bangladesh currency and REER MSCI Bangladesh ($) MSCI FM ($) 160 BDT vs $ BDT vs EUR Bangladesh REER (Dec 07 = 100). RHS 140 120 80 120 110 90 100 100 100 80
90 110 60
80 120
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 70 130 Source: MSCI, Bloomberg
60 140 Figure 69: Bangladesh vs MSCI Frontier, 12M fwd P/E (x) 50 150 Bangladesh 12M fwd P/E (x) 40 160 MSCI FM 12M fwd P/E (x) 26 24 30 170 22
20
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-95 18 Source: IMF, Bruegel, Bloomberg 16 14 12 10
8
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg
40 Renaissance Capital Nigeria 12 June 2017
NEUTRAL The Focal Point
The introduction of the special I&E window, allowing willing buyers and willing sellers to Valuations trade FX at a market-determined rate, is a positive, but not a cure-all. Eligible transactions Current 6M prior 5Y avg 10Y avg at this window include loans for repayments, interest payments and capital repatriation. 12M fwd P/E 8.5 7.3 8.8 8.6 However, with transactions not yet taking place on an electronic platform and banks Vs FM -25% -36% -20% -21% unable to trade with each other within this window, there are effectively multiple rates S-N* P/E 7.2 5.2 within this window, providing unnecessary complication for investors and making the *S-N = Sector adjusted Source: Bloomberg, Renaissance Capital return of mainstream investors likely to be slow. The FMDQ has announced that so far, about $2.13bn has traded in the I&E window between 28 April and 2 June (c. $50-100mn Positioning a day). MSCI is due to announce its view on the I&E window, and with it, Nigeria’s Current 6M prior 5Y avg 10Y avg ongoing eligibility for inclusion in the MSCI FM index, on 20 June. Our base case is that Positioning vs FM -3.9% -4.2% -589% na Nigeria remains in the index so long as progress towards a more market reflective rate Source: Bloomberg, Renaissance Capital continues. Earnings Net +ve Forecast Yvonne Mhango sees FX injections that began in February for retail transactions, and the Growth 3M revisions chg (3M) central bank’s recent introduction of FX allocations to SMEs, are positive for the real 2017 EPS 12.0% 23.4% 7.9% economy. That said, we think if the FX market remains fragmented and FX restrictions are 2018 EPS 12.1% 24.2% 4.9% sustained, a meaningful growth recovery will be delayed. While we believe Nigeria Source: Bloomberg, Renaissance Capital warrants investor interest once more, we recommend investors stick with the liquid banks, and steer clear of consumers and building materials, which we think will remain Dividends challenged in the short term. Current Rank in FM 12M fwd dividend yield 5.2 8 Source: Bloomberg, Renaissance Capital We welcome the federal government’s publication of the Economic Growth and Recovery Plan. However, implementation remains an issue: it is now June and the FY17 budget has FX yet to be passed. In the absence of a major rebound in the oil price, our SSA economist REER % over/under Spot Yvonne Mhango sees slow delivery on structural reforms and infrastructure projects as fair value fair value insufficient to allow for per-capita income growth. Combined with the government’s low FX valuation 324 364 12.3% revenue/GDP ratio and very low level of investment/GDP, this suggests that Nigeria will, at Source: IMF, Bruegel, Bloomberg, Renaissance Capital best, be a slow-burn recovery story. On the positive side, the Trans Forcados Pipeline has re-opened after being shut for 15 months, with industry sources confirming a long-term Figure 71: Nigeria’s FX rates agreement with militants not to attack the pipeline again. Nigeria’s whole economy PMI was Naira - parallel market (AbokiFX) Naira - CBN BDC rate 54.4 for May, up from 53.6 in April and a big turnaround from 46.3 in August 2016. Official rate (Bloomberg) NAFEX (FMDQ) th 550 At our 8 Annual Pan-Africa 1:1 Investor Conference in Lagos on 10-11 May, the main 500 theme was a return of stability. Banks believe the economy is past the worst of what one 450 400 described as “the most severe downturn in 25 years”. One of the big themes was the YtD 350 improvement in FX liquidity, which allowed for the unwinding of some outstanding 300 obligations. Trade facilities and velocity increased as a result, according to one bank. 250 200 During the height of the FX shortages, trade cycles lengthened to 12 months, from a 150
typical four-to-six months. The trade cycle is now contracting. Banks are cautiously
Jul-15 Jul-16
Apr-15 Oct-15 Apr-16 Oct-16 Apr-17
Jan-16 Jan-17 optimistic about the I&E FX window. One bank thinks it is a tacit devaluation and Jan-15 precursor to a more liberal FX policy. Another sees the FX rate settling at NGN370- Source: MSCI, Bloomberg 400/$1. Banks see little incentive to lend with Treasury yields in the 20s. NPLs tend to lag Figure 72: Fund positioning in Nigeria vs the economy, according to one bank. It estimates that there is 18 months to go of high benchmark NPLs and downside surprises. Consumer companies think the fundamentals of the 0% microeconomy – consumers and businesses – have not changed. They think the -1% consumer is still very stressed, unemployment high and inflation elevated. Consumers -2% have reduced the frequency of purchases, found substitutes and traded down. -3% -4% Companies are highlighting to us much better availability of FX, and according to the -5% feedback we got from the banks, the Central Bank of Nigeria (CBN) has not intervened -6% much in the I&E FX window. This is promising, in our view. It makes participants hopeful -7% that the central bank is inching towards a more liberal FX policy. Charles Robertson thinks -8% investors should cautiously assume the I&E window remains the only accessible window -9%
until the 2019 elections but sees comments recently from Vice-President Yemi Osinbajo,
Jul-15 Jul-16
Apr-15 Oct-15 Apr-16 Oct-16
Jan-16 Jan-17 that “the market should determine everything”, as implying we may see all Nigeria Jan-15 Note: based on active Frontier funds benchmarked to MSCI Frontier exchange rates converge to a market-determined rate. Source: MSCI, Bloomberg
41 Renaissance Capital 12 June 2017
The Focal Point
We raise our recommendation on Nigeria to neutral, while cognisant that international investors are unlikely to return aggressively to the market while the new window is still not fully transparent and tested, but Nigeria is the fifth cheapest market in MSCI Frontier, trading on a 12M FWD P/E of 8.4x, and we believe the direction is starting to improve, despite still significant challenges. Investors are still severely underweight Nigeria – by c. 4% vs an index weight in MSCI Frontier of 7%.
In Nigeria, we highlight Dangote Cement, Okomu, Presco, Seplat, GTB, Zenith Bank and International Breweries (see page 50 for target price and rating).
42 Renaissance Capital Kenya 12 June 2017
The Focal Point NEUTRAL
There are headwinds approaching August’s elections, but we see 2018 as a recovery Valuations year. Challenges include: 1) Drought: poor rains have led to harvests falling, food prices Current 6M prior 5Y avg 10Y avg spiking and water levels at HEP stations falling. Agriculture is the major employer, and 12M fwd P/E 11.2 10.6 10.9 10.5 household consumption growth typically falls to 1% in drought years vs 4.5% in non- Vs FM -1% -12% -2% -5% drought periods. We think this means inflation peaks in the low double-digits in 3Q17 and S-N* P/E 9.4 7.9 *S-N = Sector adjusted plateaus until YE17, but we don’t expect the central bank to hike the policy rate. 2) Weak Source: Bloomberg, Renaissance Capital credit growth: dampened by interest rate caps (there are increasing calls for the cap to be reviewed and potentially removed post-election). 3) Shilling expensive: by 24% on Positioning Yvonne Mhango’s REER model (though risks of a sharp sell-off are contained by access to an IMF ‘insurance facility’ of $990mn and reserves of over five months’ import cover). Current 6M prior 5Y avg 10Y avg 4) Elections: 2007’s post-election violence disrupted economic activity and keeps Positioning vs FM -0.10% 0.8% 0.0% na investors wary in the run up to the August poll. The announcement of former PM Raila Source: Bloomberg, Renaissance Capital Odinga as joint opposition candidate to challenge Uhuru Kenyatta for the presidency sets the scene for a re-run of 2013’s (peaceful) vote. Odinga is standing for the fourth time. We Earnings Net +ve Forecast think the markets would respond favourably to an uneventful election. 5) Slower Growth 3M revisions chg (3M) infrastructure spend: by c. 1% of GDP in FY17/18 (to 7.4% of GDP) in part due to the 2017 EPS 7.4% 5.1% 1.2% completion of the China-funded standard gauge railway (Kenya’s largest infrastructure 2018 EPS 10.6% 4.3% -0.7% project to date). Investment has been important given weak consumption of late; weak Source: Bloomberg, Renaissance Capital credit growth (4.9% YoY in December) – implies the private sector is unlikely to take up the slack. Kenya’s whole economy PMI slipped back from 50.3 in April to 49.9 in May. Dividends Current Rank in FM 2018 looking better: we don’t expect the drought to last more than the typical 12-18 12M fwd dividend yield 5.1 8 Source: Bloomberg, Renaissance Capital months, implying better agriculture in 2017/18, good for inflation and output. We see a good chance of interest rate caps being reviewed/lifted post-election. President Kenyatta FX admitted in his state of the union address that the rate cap has led to a slowdown in REER % over/under Spot lending to SMEs. A reversal of the bill could allow for a meaningful recovery in credit fair value fair value growth, which would be positive for GDP growth. Given continued challenges in Nigeria, FX valuation 103 169 64.1% Source: IMF, Bruegel, Bloomberg, Renaissance Capital and the 2018 rebound story, we still believe investors will remain exposed to Kenya among the liquid SSA markets, but it is no longer our clear SSA favourite given the extent Figure 73: MSCI Kenya vs MSCI Frontier, $ of the rebound: index bellwether, Safaricom is trading at all-time highs; KCB and Equity Bank are up 73% and 62% from their January lows, respectively. Kenya has the most MSCI Kenya ($) MSCI FM ($) overvalued currency in MSCI EM on our 20-year REER model. 300 250 Among the stocks under our coverage, we highlight Bamburi Cement and KCB (see page 200 50 for target price and rating). 150 Figure 75: Kenya Interbank rate (%) 100 35 50
30
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 25 Source: MSCI, Bloomberg
20 Figure 74: MSCI Kenya vs MSCI Frontier, 12M fwd P/E (x) 15 MSCI Kenya 12M fwd P/E (x) MSCI FM 12M fwd P/E (x) 14 10 12 5 10 0
8
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 6
Source: Bloomberg
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg
43 Renaissance Capital Morocco 12 June 2017
NEUTRAL The Focal Point
After a weak 2016 (driven by a poor harvest) the IMF expects growth to accelerate to Valuations 4.4% in 2017 (from 1.5% in 2016). 1Q trends are already supportive, with 1Q17 growth up Current 6M prior 5Y avg 10Y avg 4.3% YoY. 12M fwd P/E 18.2 17.2 14.4 14.5 Vs FM 561% 64% 29% 33% The government has finally been formed (six months after the October elections) and S-N* P/E 18.4 17.2 *S-N = Sector adjusted announced plans to phase out all remaining subsidies: low income families will receive Source: Bloomberg, Renaissance Capital support to afford essential items. By 2021, the government plans for a budget deficit of 3% of GDP, 4.5-5.5% growth, 2% inflation, government debt to GDP sub-60% and Positioning unemployment of 8.5%, and to be a top-50 country in the World Bank’s Doing Business Current 6M prior 5Y avg 10Y avg survey by 2021. Positioning vs FM -6.5% -7.4% -6.3% na Source: Bloomberg, Renaissance Capital The central bank announced that the process of floating the dirham should start in June this year, but a full float might still be 15 years away. Earnings Net +ve Forecast Growth 3M revisions chg (3M) Morocco is trading on 18.2x 12M FWD P/E, making it the most expensive market in 2017 EPS 3.9% -21.9% -3.8% frontier; the market is trading at a sizeable premium to its 10-year average of 14.5x). 2018 EPS 6.9% -6.9% -2.3% MSCI Frontier benchmarked active investors have decreased their underweight in Source: Bloomberg, Renaissance Capital Morocco from 7.4% to 6.5% over the past six months, but Morocco is still the second most underweight country in frontier (after Kuwait). The tentative reopening of Nigeria to Dividends foreign investors via the I&E window – as well as Egypt’s recent currency adjustment – Current Rank in FM may reduce Morocco’s attractiveness as a safe haven trade. 12M fwd dividend yield 3.8 17 Source: Bloomberg, Renaissance Capital
Figure 78: Morocco real GDP growth (%) FX REER % over/under 8 Spot fair value fair value 7 FX valuation 9.72 10.00 2.9% Source: IMF, Bruegel, Bloomberg, Renaissance Capital 6 Figure 76: MSCI Morocco vs MSCI Frontier, $ 5 MSCI Morocco ($) MSCI FM ($) 4 150
3 130
2 110 90 1 70 0
50
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2017E 2018E 2019E 2020E
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: IMF April 2017 WEO Source: MSCI, Bloomberg
Figure 77: MSCI Morocco vs MSCI Frontier, 12M fwd P/E (x) MSCI Morocco 12M fwd P/E (x) MSCI FM 12M fwd P/E (x) 22 20 18 16 14 12 10 8
6
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg
44 Renaissance Capital Vietnam 12 June 2017
The Focal Point OVERWEIGHT
The IMF expects GDP growth to rebound to 6.5% in 2017 from 6.2% in 2016 (a dip driven Valuations by weak agriculture and oil production). 2016 saw record FDI which should feed through Current 6M prior 5Y avg 10Y avg into growth and exports, helped by continued recovery in the US (notwithstanding the 12M fwd P/E 17.1 16.0 13.9 12.7 cancellation of the TPP trade deal) and a new free trade agreement with the EU effective Vs FM 51% 32% 25% 15% beginning 2018. Agriculture looks set to rebound cyclically which in turn should improve S-N* P/E 16.4 16.8 *S-N = Sector adjusted the outlook for consumption. Vietnam set up a record number of private enterprises: Source: Bloomberg, Renaissance Capital 110,000 in 2016 up by 16.2% from 2015. Positioning The budget deficit remains large: 6.6% of GDP in 2016 but the IMF expects this to be Current 6M prior 5Y avg 10Y avg brought back to 5.7% by the government’s ambitious plans to cut recurrent expenditure by Positioning vs FM -2.8% -1.4% 0.5% na 6% and raise capital expenditure by 36% - over the longer run, tax reform and more efficient Source: Bloomberg, Renaissance Capital public administration will be needed to tackle the deficit. The government plans to plug the deficit via higher receipts from sales of stakes in SOEs (recognised as revenues in the Earnings Net +ve Forecast national accounts) which bodes well for the privatisation process and greater transparency. Growth 3M revisions chg (3M) 2017 EPS 20.4% 0.0% -1.8% Progress remains sluggish on restructuring the banks and tackling NPLs: in order to reach 2018 EPS 17.9% 4.3% -2.4% the target Basel II capital thresholds by 2020 as the government targets will require Source: Bloomberg, Renaissance Capital capital injections, most likely from foreign investors which suggests further lifting of limits on foreign investment as well as updates to the legal framework. Dividends Current Rank in FM With growth accelerating and administered prices for education, health, electricity and 12M fwd dividend yield 2.2 20 Source: Bloomberg, Renaissance Capital water rising, the IMF expects inflation to rise: from 4.7% at the end of 2016 to 5.0% at the end of 2017. Though Vietnam has the second most overvalued currency in frontier on our FX 20-year REER model, exports have been accelerating and are up 17.4% YtD, providing REER % over/under Spot support for the current account surplus. fair value fair value FX valuation 22,690 30,924 36.13% Figure 81: Vietnam credit to private sector, % YoY Source: IMF, Bruegel, Bloomberg, Renaissance Capital
45% Figure 79: MSCI Vietnam vs MSCI Frontier, $
40% MSCI Vietnam ($) MSCI FM ($) 150 35% 130 30% 110 25% 90 20% 70 15% 50
10%
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 5% Jan-10 Source: MSCI, Bloomberg 0%
Figure 80: MSCI Vietnam vs MSCI Frontier, 12M
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-10 fwd P/E (x) Source: IMF MSCI Vietnam 12M fwd P/E (x) MSCI FM 12M fwd P/E (x) 20 18 16 14 12 10 8
6
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg
45 Renaissance Capital Romania 12 June 2017
NEUTRAL The Focal Point
The IMF expects Romania to be the fastest growing country in the EU during 2017, with Valuations GDP expanding by 4.2%, not far off 2016’s 4.8% (which was an eight-year high), and Current 6M prior 5Y avg 10Y avg driven primarily by pro-cyclical fiscal policy and wage growth. However, the current 12M fwd P/E 10.8 10.1 9.1 8.7 account is starting to widen: from near balance in 1Q15 to a 2.3% deficit in 4Q16, with the Vs FM -5% -14% -18% -21% IMF expecting further widening to 2.8% in 2017. S-N* P/E 12.4 12.7 *S-N = Sector adjusted Source: Bloomberg, Renaissance Capital The quality of Romania’s growth is diminishing, underpinned as it is by wage growth and fiscal easing: average gross wages grew by 15.1% in March. The output gap closed in Positioning 2016: with above potential growth expected in 2017-18 and a tightening labour market Current 6M prior 5Y avg 10Y avg inflation looks likely to increase albeit from a low base of just 0.6% in April. 1Q17 saw the Positioning vs FM -1.0% 0.6% 0.3% na minimum wage hiked by 16% and public wages by 15% in health and education and by Source: Bloomberg, Renaissance Capital 20% in local administration. March’s consumer confidence figure reached an all-time high Earnings (with only a small correction in April and May); May’s European Commission Economic Net +ve Forecast Growth Sentiment indicator for Romania hit 105.9, a post-GFC high. 3M revisions chg (3M) 2017 EPS -3.2% -10.5% 3.8% Inflation has been kept down by tax cuts; the central bank sees inflation at 1.7% by year- 2018 EPS 9.8% -5.6% 3.9% end (the IMF expects 2.2%) and 3.4% by end-2018 (the IMF expects 3.1%) vs a target of Source: Bloomberg, Renaissance Capital 2.5% +/-1%). The benchmark rate is currently 1.75%, with consensus expecting a first hike in late 2017-early 2018. Dividends Current Rank in FM 12M fwd dividend yield 5.4 6 The budget in Romania is expansionary following December 2016’s elections (and Source: Bloomberg, Renaissance Capital encouraged by January’s protests). Eurostat estimated the 2016 budget deficit at 3% of GDP (the maximum allowed under the growth and stability pact and up from 0.8% of GDP in FX 2015). The European Commission has estimated a headline deficit of 3.5% of GDP in 2017 REER % over/under Spot and 3.7% in 2018. The IMF has highlighted the risk of policies such as the unified wage bill, fair value fair value social security reductions and further tax cuts could raise the deficit by up to 5.5% of GDP FX valuation 4.07 4.63 13.8% Source: IMF, Bruegel, Bloomberg, Renaissance Capital over 2017-2021. Moody’s downgraded its outlook from positive to stable on account of Romania’s rising government debt stock. Barring a move to include Romania in MSCI’s next Figure 82: MSCI Romania vs MSCI Frontier, $ annual review round (which will be announced on 20 June) which we still consider unlikely this year, we see most of the good news in Romania as already in the price. MSCI Romania ($) MSCI FM ($) 170 Figure 84: Eurozone economic surprise indicator 150 130 150 110 90 100 70 50
50
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 0 Source: MSCI, Bloomberg
-50 Figure 83: MSCI Romania vs MSCI Frontier, 12M fwd P/E (x) -100 MSCI Romania 12M fwd P/E (x) MSCI FM 12M fwd P/E (x) 14 -150
12
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: Bloomberg 10
8
6
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Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg
46 Renaissance Capital Kazakhstan 12 June 2017
The Focal Point OVERWEIGHT
Oleg Kouzmin sees Kazakhstan as a broad macro stabilisation story in 201, to be Valuations followed by an acceleration of growth next year. With Kazakhstan’s economy fully Current 6M prior 5Y avg 10Y avg adjusted to the weaker oil price environment, we expect that 2017 could be a good year, 12M fwd P/E 7.1 6.7 6.5 6.4 with accelerating growth (2.3%, followed by 2.9% in 2018, vs 1.0% in 2016), and a stable Vs EM -38% -37% -42% -42% currency (KZT320/$), inflation (6.7%) and interest rates (10%). He also emphasises the S-N* P/E 5.7 6.0 *S-N = Sector adjusted reform efforts by the Kazakh authorities, although he expects implementation and positive Source: Bloomberg, Renaissance Capital macro externalities to become visible only after some time. Kazakhstan is likely to show the highest growth among the oil-exporting countries in the CIS (including Russia and Positioning Azerbaijan). Current 6M prior 5Y avg 10Y avg Positioning vs FM 0.2% -0.1% -0.3% na Inflation is likely to remain within the 6-8% target range, which gives room for a moderate Source: Bloomberg, Renaissance Capital easing in rates. After peaking at 17.6% in July 2016, inflation came in at 8.5% at end- 2016 and is likely to stabilise within the 6-8% target range (6.7% in 2017 and 7.3% in Earnings Net +ve Forecast 2018), given no excessive demand-side pressures, a stable exchange rate, fairly tight Growth 3M revisions chg (3M) interest rate policies and declining inflation expectations. We believe the National Bank of 2017 EPS 26.9% 0.0% -4.9% Kazakhstan (NBK) has mainly completed the rate normalisation cycle and could cut the 2018 EPS 8.9% 16.7% -4.1% policy rate by 1 ppt further in the rest of the year (to 10%), and probably again by 1 ppt Source: Bloomberg, Renaissance Capital next year. Dividends First and foremost – the issue of political succession. Although we see certain concerns Current Rank in FM on the macro side, the one question that always emerges from our discussions with 12M fwd dividend yield 3.9 14 Source: Bloomberg, Renaissance Capital investors is the issue of the succession of political power in the medium term. Our belief is that the recent reform efforts highlight that the Kazakh authorities have addressed this FX issue, which implies, in our view, that the country would be able to ensure a smooth REER % over/under Spot transition of political power. We therefore think investors could eventually be surprised fair value fair value positively by the development of the reform agenda, as well as privatisation. The tenge FX valuation 314 280 -10.8% still looks cheap on our 20-year REER model. Source: IMF, Bruegel, Bloomberg, Renaissance Capital
Figure 85: MSCI Kazakhstan vs MSCI Frontier, $ We highlight KMG and Halyk Savings Bank (see page 50 for target prices and recommendations) MSCI Kazakhstan ($) MSCI FM ($) 150 Figure 87: Kazakhstan currency and REER
KZT vs $ KZT vs EUR Kazakhstan REER (Dec 07 = 100). RHS 100 450 60 50 400 70 350 0 80
300
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 250 90 Source: MSCI, Bloomberg
200 100 Figure 86: MSCI Kazakhstan vs MSCI Frontier, 150 12M fwd P/E (x) 110 MSCI Kazakhstan 12M fwd P/E (x) 100 MSCI FM 12M fwd P/E (x) 14 50 120 12
10
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 8 Source: IMF, Bruegel, Bloomberg 6 4
2
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: MSCI, Bloomberg
47 Renaissance Capital Ge orgia 12 June 2017
OVERWEIGHT The Focal Point
Oleg Kouzmin believes Georgian growth could hit 4% in 2017-2018, and expect Georgian Figure 88: Georgia Real GDP growth, % YoY GDP growth to reach 4.2% in 2017 (from 2.7% in 2016) and 4.1% in 2018. First, we 14 believe growth acceleration could be supported by a favourable external environment as 12 soon as regional oil exports have adapted to the new environment of weaker oil prices. 10 Exports were up by 27% YoY in January-February 2017, while remittances increased by 8 6 22% in 1Q17, exceeding significantly our full-year expectations of 8% and 10-15%, 4 respectively. Tourism arrivals in 1Q17 also increased by 26% YoY. Second, higher 2 domestic investment activity, resulting from higher state infrastructure spending and an 0 -2 easing tax regime for corporates, is also likely to support growth acceleration. Growth -4 risks look balanced to us. Our 4.2% Georgian GDP growth forecast for 2017 compares -6
with 3.7% Bloomberg consensus and the latest 3.5% IMF forecast. On the negative side,
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2018E 2019E 2020E we raise our end-2017 inflation forecast to 5.8%, from 4.1% previously. On the positive 2017E Source: IMF April 2017 WEO side, indicators at the start of the year look good; the flash growth estimate, provided by the National Statistics Office, was 4.8% YoY in January-February 2017. This makes us Figure 89: Georgia current account balance (% feel comfortable with our forecast. GDP) 0 The Georgian lari has stabilised after short-term weakness. After short-term currency -5 weakness triggered by a sell-off in the Turkish lira, unfavourable seasonality and certain other one-off factors, with the exchange rate hitting a record low of GEL2.82/$ on 21 -10 December 2016, the lari has appreciated back closer to its fair value, which was also in line with our views (see Has the lari reached the bottom? dated 21 December 2016, and -15 Lari: how are you? dated 12 January 2017). We believe the currency, trading at -20 GEL2.447/$, is now close to its fair value. Thus, the fair value could be even in line with our previous end-2017 exchange rate forecast of GEL2.50/$, and we think the lari could -25
remain here if the rouble and the Turkish lira perform well. However, given our
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2018E 2019E 2020E 2017E expectations of moderate rouble weakness and lira risks, we prefer to keep our latest Source: IMF April 2017 WEO GEL2.60/$ end-2017 forecast unchanged. We see the lari at GEL2.65/$ by the end of December 2018.
We highlight TBC Bank (see page 50 for target prices and recommendations).
Figure 90: Georgia currency and REER
GEL vs $ GEL vs EUR Georgia REER (Dec 07 = 100). RHS 3.5 50
60 3.0 70
2.5 80 90
2.0 100
110 1.5 120
1.0 130
Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: IMF, Bruegel, Bloomberg
48 Renaissance Capital Iran 12 June 2017
The Focal Point
Iran’s presidential election on Friday (18 May) saw President Hassan Rouhani emphatically Figure 91: Iran real GDP growth, % YoY re-elected, achieving a majority in the first round and avoiding the need for a second-round run-off. The scale of Rouhani’s victory gives Iran’s pro-reform camp its strongest mandate in 10 more than a decade to push forward reforms. Rouhani won with 57.1% of the vote, up from 8 50.7% in 2013 – enough to win outright in the first round, and placing him well ahead of his 6 4 main opponent, Ebrahim Raisi, the lead candidate endorsed by the Principalists and a 2 former judge (seen as close to the officially neutral Revolutionary Guards), who polled 0 38.3%. Turnout was 73.1% (up from 72.7% in 2013). Rouhani’s victory speech outlined a -2 path of greater openness and reform for Iran –glasnost and perestroika, if you like. He said, -4 “Our nation’s message in the election was clear: Iran’s nation chose the path of interaction -6
with the world, away from violence and extremism”. -8
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
2018E 2019E 2020E 2017E Though we see the election result as good news for reform, we continue to see Iran as Source: IMF April 2017 WEO still pretty much off-limits for most mainstream institutional equity investors (and essentially all US investors), given the continued lack of international custody in Iran; the Figure 92: Iran current account balance (% GDP) legal due diligence required to ensure no remaining sanctions are inadvertently breached; and the risk of sanctions snapping back should relations – particularly with the US – be 12 seen to worsen. Western banks have yet to set up in Iran, and while some smaller banks 10 have started to reconnect to Iran, the major international banks are still unable to offer 8 transfers to the country. But recent cross border transactions – such as Henkel’s EUR200mn of acquisitions in Iran; PSA’s plans to invest more than EUR100mn in a 6 Citroen plant; and Boeing’s $20bn of agreements – suggest that international corporates 4 will be keen for financial linkages to improve. 2
Key reforms that we see as priorities for Iran include the much-delayed recapitalisation 0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
and reform of the banking system (which the IMF describes as urgently needed); greater 2006
2018E 2019E 2020E 2017E independence for the central bank; removing remaining controls on interest rates and Source: IMF April 2017 WEO prices; merging the official (IRR32,440/$) and parallel (IRR37,300/$) market exchange rates; and, over the longer term, reducing the role of the state and quasi-state entities in the corporate sector and implementing ease of doing business reforms (Iran ranks 120th out of 190 countries in the World Bank’s 2017 survey). We note that the vice-chairman of Iran’s Securities and Exchange Organisation, Bahador Bijani, has announced that foreigners who acquire a FIPPA licence will be able to transfer funds using the parallel rate. Bringing in foreign investment and recapitalising the banks will be key to bringing down interest rates and allowing Iranian companies to invest and grow. Geopolitics is probably the greatest risk to the Iran rehabilitation trade right now. US President Donald Trump’s first international trip as the president took him to Saudi Arabia and Israel, both countries are hostile towards Iran, and the president’s speech in Saudi Arabia (where he signed $350bn worth of deals), laid out a hawkish stance: “until the Iranian regime is willing to be a partner for peace, all nations of conscience must work together to isolate Iran, deny it funding for terrorism, and pray for the day when the Iranian people have the just and righteous government they deserve”.
Figure 93: Iran Stock Exchange TEDPIX Index (lcl) 900 800 700 600 500 400 300 200
100
Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-10 Source: Tehran Stock Exchange
49 Renaissance Capital 12 June 2017
The Focal Point
Figure 94: RenCap ratings and target prices Mkt Cap FF Mkt Cap 3MADTV, Ticker Name Country Rating CP TP Upside ($mn) ($mn) $mn NPN SJ Naspers South Africa OUTPERFORM ZAR2,649.0 ZAR3,460.0 31% 91,618 91,618 203.0 SBER RX Sberbank Russia OUTPERFORM RUB151.9 RUB215.0 42% 56,887 28,443 127.0 SNH SJ Steinhoff South Africa OUTPERFORM ZAR64.7 ZAR90.0 39% 22,143 15,500 61.7 AAL LN Anglo American South Africa OUTPERFORM GBP10.6 GBP12.5 18% 17,784 17,777 118.7 SLM SJ Sanlam South Africa OUTPERFORM ZAR66.1 ZAR88.0 33% 11,295 7,341 30.1 DANGCEM NL Dangote Cement Nigeria OUTPERFORM NGN205.0 NGN197.0 -4% 11,099 777 0.8 ADCB UH Abu Dhabi Comm. Bk. UAE OUTPERFORM AED07.3 AED08.6 18% 10,303 4,121 3.9 FIVE LI X5 Russia OUTPERFORM $36.7 $41.0 12% 9,573 3,829 15.2 MBT US MTS Russia OUTPERFORM $09.4 $11.0 17% 9,522 4,761 34.5 ORDS QD Ooredoo Qatar OUTPERFORM QAR95.7 QAR115.0 20% 8,376 2,094 3.5 DIB UH Dubai Islamic Bank UAE OUTPERFORM AED05.8 AED06.6 14% 7,804 1,951 5.1 MDC LN Mediclinic South Africa OUTPERFORM GBP07.8 GBP09.8 25% 7,466 3,887 16.2 486 HK Rusal Russia OUTPERFORM HKD03.8 HKD08.0 109% 7,384 988 1.8 IRAO RX InterRAO Russia OUTPERFORM RUB03.9 RUB07.6 93% 7,307 2,192 7.3 SAHOL TI Sabanci Holding Turkey OUTPERFORM TRY10.7 TRY12.9 20% 6,253 2,814 16.4 AMS SJ Anglo American Plat. South Africa OUTPERFORM ZAR274.6 ZAR350.0 27% 6,161 1,232 9.1 MAIL LI Mail Russia OUTPERFORM $27.0 $28.0 4% 5,920 2,664 10.0 WHL SJ Woolworths South Africa OUTPERFORM ZAR64.0 ZAR91.0 42% 5,252 4,990 21.4 KMG LI KMG Kazakhstan OUTPERFORM $09.7 $11.5 19% 3,968 1,587 1.2 AFLT RX Aeroflot Russia OUTPERFORM RUB192.1 RUB215.0 12% 3,760 1,831 9.5 GUARANTY NL Guaranty Nigeria OUTPERFORM NGN33.6 NGN32.6 -3% 3,132 1,566 1.8 UPRO RX Unipro Russia OUTPERFORM RUB02.6 RUB03.6 37% 2,877 575 1.3 CCOLA TI Coca-Cola Icecek Turkey OUTPERFORM TRY37.5 TRY43.6 16% 2,720 816 4.1 EXX SJ Exxaro South Africa OUTPERFORM ZAR95.4 ZAR120.0 26% 2,363 1,536 15.8 SNT SJ Santam South Africa OUTPERFORM ZAR238.0 ZAR293.0 23% 2,140 642 1.2 HSBK LI Halyk Savings Bank Kazakhstan OUTPERFORM $07.7 $09.5 23% 2,106 421 0.6 ZENITHBA NL Zenith Bank Nigeria OUTPERFORM NGN20.5 NGN25.6 25% 2,065 1,032 1.8 DCP SJ DisChem South Africa OUTPERFORM ZAR28.1 ZAR29.0 3% 1,899 460 1.9 ULKER TI Ulker Biskuvi Turkey OUTPERFORM TRY19.8 TRY24.8 25% 1,898 854 5.3 CML SJ Coronation South Africa OUTPERFORM ZAR67.5 ZAR80.0 18% 1,852 1,204 6.0 ALTAYYAR AB Al Tayyar Saudi Arabia OUTPERFORM SAR28.2 SAR52.0 85% 1,574 1,106 21.1 EAST EY Eastern Tobacco Egypt OUTPERFORM EGP265.0 EGP336.0 27% 1,462 658 1.3 GLTR LI Globaltrans Russia OUTPERFORM $08.2 $09.1 12% 1,430 779 4.4 KNCB KN KCB Kenya OUTPERFORM KES40.0 KES37.6 -6% 1,187 890 1.0 SWDY EY El Sewedy Electric Egypt OUTPERFORM EGP89.1 EGP125.0 40% 1,098 392 0.6 ETEL EY Egypt Telecom Egypt OUTPERFORM EGP10.6 EGP15.9 50% 996 199 1.1 MDMG LI Medical Group Russia OUTPERFORM $10.0 $13.3 33% 790 251 0.8 CIEB EY Credit Agricole Egypt Egypt OUTPERFORM EGP45.0 EGP46.7 4% 772 193 0.6 OGKB RX OGK2 Russia OUTPERFORM RUB00.4 RUB00.6 48% 754 199 0.8 SEPL LN Seplat Nigeria OUTPERFORM GBP00.9 GBP01.2 26% 673 292 0.3 GND SJ Grindrod South Africa OUTPERFORM ZAR10.9 ZAR13.8 27% 664 381 0.8 BMBC KN Bamburi Cement Kenya OUTPERFORM KES171.0 KES178.0 4% 597 18 0.1 RFG SJ Rhodes Food South Africa OUTPERFORM ZAR24.3 ZAR30.0 24% 469 207 0.7 PHDC EY Palm Hills Developments Egypt OUTPERFORM EGP03.1 EGP04.4 41% 413 234 1.6 INTBREW NL International Breweries Nigeria OUTPERFORM NGN29.2 NGN21.8 -25% 337 82 0.0 OCDI EY SODIC Egypt OUTPERFORM EGP15.0 EGP18.5 24% 280 182 1.3 PRESCO NL Preso Nigeria OUTPERFORM NGN59.5 NGN98.5 66% 199 79 0.1 OKOMUOIL NL Okomu Nigeria OUTPERFORM NGN60.6 NGN85.3 41% 184 174 0.0 AUTO EY GB Auto Egypt OUTPERFORM EGP02.2 EGP03.2 45% 132 60 0.5 YATAS TI Yatas Turkey OUTPERFORM TRY10.4 TRY13.4 29% 126 106 1.5 ULUSE TI Ulusoy Elektrik Turkey OUTPERFORM TRY10.9 TRY14.4 33% 123 13 0.3 LKMNH TI Lokman Hekim Turkey OUTPERFORM TRY05.2 TRY07.1 38% 35 31 0.5 Prices are as of 7 June 2017 Source: Bloomberg, Renaissance Capital
50 Renaissance Capital EM and Frontier from above 12 June 2017
The Focal Point
2016 saw a turbulent start for EM, dropping 14% in the first three weeks to complete a 35% decline from its high in April 2015. The index rebounded 35% by early September, then sold off 10% heading into the November 2016 US elections, finishing the year up a little under 9%. 2017 has seen the EM rally that began after the US elections continue, with EM up 18% YtD. By contrast, Frontier has lagged, rising 12% YtD, following a lacklustre 1% drop over 2016. To date, 2017 marks the third year that Frontier has underperformed EM.
Figure 95: Performance, MSCI EM Figure 96: Performance, MSCI Frontier
MSCI EM performance, YtD ($) MSCI Frontier performance YtD ($) 40% 50% 35% 40% 30% 25% 30% 20% 20% 15% 10% 10% 5% 0% 0% -10% -5%
-10% -20%
EM
UAE
Peru
India
Chile
Brazil
Qatar
Oman
Egypt
China
Kenya
Serbia
Latam
Kuwait
Czech EMEA
Jordan
Nigeria
Croatia Tunisia
Russia
Turkey
Poland
Estonia
Mexico
Taiwan
Bahrain Frontier
Greece
Vietnam Senegal
Slovenia Pakistan Morocco
Lebanon
EM Asia EM
Hungary
Romania
Thailand
Mauritius
Lithuania
Malaysia
Sri Lanka Sri
Argentina
Colombia
Indonesia
Philippines
Ivory Coast Ivory
Kazakhstan
Bangladesh
South Africa South Saudi Arabia Saudi South Korea South Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
In EM Poland has been the top performer YtD, followed by South Korea and Turkey. Russia is the worst performer, though this followed a 50% rally over 2016, followed by Qatar and the UAE. Argentina, Romania and Kazakhstan have performed well in Frontier, with Oman, Lebanon and Tunisia faring worst.
Figure 97 shows performance by sector to see what the main drivers have been.
Figure 97: EM country-sector performance, $ (YtD) Cons. Cons. Real Energy Financials Healthcare Industrials IT Materials Telecoms Utilities Overall disc. staples estate Poland 24% -12% 36% 35% - - - 24% - -5% 25% 31% South Korea 21% 24% 25% 28% 21% 28% 37% 14% - 26% 6% 29% Turkey 24% 26% 39% 27% - 24% - 33% 0% 23% - 26% Greece 16% - - 29% - - - 25% - 20% - 23% China 42% 3% 3% 13% 24% 12% 37% 13% 45% 5% 16% 23% India 26% 34% 22% 34% -4% 39% 7% 32% - 23% 12% 22% Mexico 16% 25% - 20% - 24% - 10% 22% 29% 9% 21% Taiwan 9% 22% 3% 12% 10% 18% 26% 7% 12% 15% - 20% EM 26% 15% 1% 14% 9% 20% 31% 10% 22% 10% 8% 18% Philippines 12% -2% - 14% - 17% - - 24% 39% 3% 17% Hungary - - 16% 11% 24% ------15% South Africa 30% 14% 14% 6% 4% 5% - 6% 9% 6% - 15% Chile 7% 8% 21% 11% - 36% - 23% - 7% 16% 15% Malaysia 27% 9% 16% 20% 5% 22% - 5% 14% 10% 3% 15% Czech - - - 12% - - - - - 21% 15% 14% Indonesia 8% 13% 13% 20% 5% 8% - 13% 5% 13% -8% 14% Colombia - - 3% 10% - - - 10% - - 44% 12% Egypt - - - 15% - - - - -16% -8% - 8% Thailand 7% 2% 6% 12% -8% 10% 6% 14% 27% 12% 9% 8% Peru - - - 7% - - - 10% - - - 8% Brazil 5% 8% -10% 3% 18% 10% -3% 1% 10% 10% -9% 2% UAE -42% - - 6% - 33% - - -5% -6% - 0% Qatar - - -28% -5% - -17% - - -21% -6% -16% -10% Russia - -20% -14% -4% - - - -13% - -8% 3% -12% Source: MSCI, Bloomberg
51 Renaissance Capital 12 June 2017
The Focal Point
Across EM, the rally has been driven by IT, consumer discretionary and industrials. Key country sectors have been Polish energy and financials, South Korean IT, Turkish energy and materials and China consumer discretionary, IT and real estate. UAE consumer discretionary has been the worst segment, hit by the growth slowdown; Qatari energy and Russian consumer have also been underwhelming.
In Frontier, utilities, energy and consumer discretionary have fared particularly well. Key country sectors have been Argentine utilities, energy and financials, Romanian energy, Nigerian banks (with the caveat that at present, MSCI is using an official rate of NGN315/$, while the investors and exporters rate is NGN380/$). Omani and Bangladeshi materials have fared particularly poorly, while off-index Saudi Arabia saw industrials posting the worst performance.
Figure 98: FM country-sector performance, $ (YtD) Cons. Cons. Real Energy Financials Healthcare Industrials IT Materials Telecoms Utilities Overall disc. staples estate Argentina 33% 2% 48% 56% - - 24% - - 40% 83% 50% Romania - - 39% 29% ------20% 32% Nigeria - 8% -18% 50% - - - 22% - - - 26% Kazakhstan - - 25% 26% ------25% Kenya - -3% - 36% - - - - - 15% - 17% Bahrain - - - 21% - - - 32% - -9% - 16% Frontier 26% 11% 25% 16% 9% 15% 24% 0% -1% 5% 52% 14% Mauritius - - - 22% - - - - 9% - - 12% Croatia - - - - - 10% - - - 11% - 11% Ivory Coast - - - 10% ------10% Slovenia - - - 25% 8% ------10% Vietnam - 19% - 14% - - - 4% -3% - -9% 10% Serbia - - 6% - - 17% - - - - - 10% Sri Lanka - 22% - -6% - 16% - - - - - 9% Estonia 1% - - - - 10% - - - - - 7% Lithuania 10% ------5% - 7% Kuwait - - - 4% - 18% - - -3% 4% - 4% Bangladesh - - 1% - 11% - - -23% - 16% - 4% Jordan - 4% - 0% ------1% Morocco - - - 3% - - - -5% 15% -3% 10% 0% Senegal ------1% - -1% Saudi Arabia 4% 15% 1% -3% - -24% - -1% -4% -7% 0% -2% Pakistan 20% - -2% -5% - - - 1% - -9% -1% -2% Tunisia - - - -4% ------4% Lebanon - - - -2% - - - - -13% - - -6% Oman - - - -5% - - - -29% - -21% - -13% Source: MSCI, Bloomberg
52 Renaissance Capital 12 June 2017
The Focal Point
Looking ahead: Where is the growth?
(This section is adapted from Renaissance Capital’s Chief Economist Charles Robertson’s report Populism Matters, 15 May 2017).
Figure 99: Aggregate real GDP growth (weighted by $ GDP), 2017E Figure 100: Aggregate real GDP growth (weighted by $ GDP), 2018E
2017E Real GDP Growth (% YoY) 2017E GDP acceleration (ppts) 2018E Real GDP Growth (% YoY) 2018E GDP acceleration (ppts) 7% 7%
6% 6%
5% 5%
4% 4%
3% 3%
2% 2%
1% 1%
0% 0%
-1% -1% EM-Asia EM FM EM-EMEA DM EM-LatAm EM-Asia EM FM EM-EMEA EM-LatAm DM
Source: IMF, Renaissance Capital Source: IMF, Renaissance Capital
Taking the bird’s eye view, the IMF forecasts MSCI EM countries to grow by 4.7% in real terms over 2017 – ahead of DM (1.6% for 2017), with EM Asia the fastest growing region, followed by EM EMEA. However, Frontier does have a better growth acceleration than either EM or DM for both 2017 and 2018.
By country, Brazil, Greece and Russia are forecast to have the strongest growth accelerations over 2017, with UAE, Egypt and Mexico seeing the worst growth slowdowns.
Figure 101: Brazil and Emerging Europe are forecast to improve most in 2017
GDP % ch 2016 GDP % ch 2017E GDP growth acceleration 16-17E 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0
-6.0
US EU
UAE
Peru
India
Chile
Brazil Qatar
Egypt
China
Korea
Japan
Russia Turkey
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia
Euro area Euro
Philippines South Africa South
Czech Republic Czech Source: IMF, Renaissance Capital
Looking further out to 2018, UAE, Brazil and Egypt have the strongest accelerations in 2018 vs 2017, while the Czech Republic, Qatar and China are forecast to have to worst slowdowns in EM. Overall, EMEA holds seven of the top eight accelerations stories for 2017, and five of the top eight for 2018.
53 Renaissance Capital 12 June 2017
The Focal Point
Figure 102: GDP growth, 2017-18E and acceleration, EM GDP growth, 2017E GDP growth, 2018E GDP growth acceleration, 17E-18E 9 8 7 6 5 4 3 2 1 0 -1
-2
US EU
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Korea
Japan
Russia
Turkey
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia
Euro area Euro
Philippines South Africa South
Czech Republic Czech Source: IMF, Renaissance Capital
In the Frontier space, Argentina, Morocco, Nigeria, Tunisia and Kazakhstan are expected to show the best improvement as we progress through 2017. Georgia deserves a positive mention too.
Figure 103: Argentina, North Africa and Nigeria improving into 2017
GDP % ch 2016 GDP % ch 2017E GDP growth acceleration 16-17E 10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
Iran
Oman
Kenya
Serbia
Kuwait
Jordan
Nigeria
Tunisia Croatia
Estonia
Bahrain Ukraine
Georgia
Vietnam Senegal
Morocco Pakistan Slovenia
Lebanon
Romania
Mauritius
Lithuania
Sri Lanka Sri
Argentina
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Source: IMF, Renaissance Capital
54 Renaissance Capital 12 June 2017
The Focal Point
But as we progress through this year, IMF forecasts suggest investors should be turning to the oil exporters, including Kuwait and Oman, but also Nigeria and Kazakhstan.
Figure 104: Oil exporters look best placed as we head into 2018 GDP growth, 2017E GDP growth, 2018E GDP growth acceleration, 17E-18E 8 7 6 5 4 3 2 1 0 -1
-2
Iran
Oman
Kenya
Serbia
Kuwait
Jordan
Nigeria
Tunisia Croatia
Estonia
Bahrain Ukraine
Georgia
Vietnam
Senegal
Pakistan Morocco Slovenia
Lebanon
Romania
Mauritius
Lithuania
Sri Lanka Sri
Argentina
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Source: IMF, Renaissance Capital
IMF and the market – where is the divergence?
The IMF does not have a perfect track record for growth forecasts, so as a cross-check we can look at what consensus is expecting for EM in terms of growth. For the most part, consensus is in line with IMF figures, with the main outliers being Greece, where the IMF is much more optimistic (consensus expects 0.9% growth over 2017 vs 2.2% for the IMF) and the UAE, where the IMF is much more pessimistic (consensus is at 2.6% vs 1.5% for the IMF). Consensus is also more positive on Brazil, expecting 0.7% growth vs 0.2% for the IMF.
Figure 105: EM Bloomberg consensus vs IMF forecasts, 2017E real GDP growth (%)
Bloomberg consensus real GDP growth, 17E (%) IMF real GDP growth, 17E (%) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0
0.0
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Korea
Czech
Turkey Russia
Poland
Mexico
Taiwan
Greece
Hungary
Pakistan Thailand
Malaysia
Colombia
Indonesia
Philippines South Africa South
Source: IMF, Renaissance Capital
In Frontier, Kuwait has the largest divergence between consensus and the IMF (1.4% vs - 0.2%), followed by Oman (1.5% vs 0.4%) and Nigeria (1.5% vs 0.8%). Consensus is also expecting slightly slower growth from Bangladesh (6.6% vs IMF forecasts of 6.9%).
55 Renaissance Capital 12 June 2017
The Focal Point
Figure 106: Bloomberg consensus vs IMF forecasts, 2017E real GDP growth (%)
Bloomberg consensus real GDP growth, 17E (%) IMF real GDP growth, 17E (%) 8 7 6 5 4 3 2 1 0
-1
Oman
Kenya
Serbia
Kuwait Ghana
Jordan
Nigeria
Croatia Tunisia
Estonia
Ukraine
Bahrain
Georgia
Vietnam
Morocco Slovenia
Lebanon
Romania
Lithuania
Sri Lanka Sri
Argentina
Kazakhstan
Bangladesh Saudi Arabia Saudi
Source: IMF, Renaissance Capital
What about disinflation stories?
In EM, 2017 shows for the most part a return to healthy inflation levels. Only three countries are forecast to have inflation of over 5% on average, while no country has inflation of less than 1%.
Figure 107: Egypt, Turkey and South Africa have highest inflation in EM Inflation, average (% YoY) 2016 2017E 2018E 25
20
15
10
5
0
-5
UAE
Peru
India
Chile
Brazil Qatar
Egypt
China
Korea
Czech
Turkey Russia
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia Philippines South Africa South Source: IMF, Renaissance Capital
In terms of disinflation stories, Brazil, Colombia and Russia should see inflation continue to fall over 2017, supporting a benign rate environment. Egypt’s dramatic rise in inflation is largely due to one-off effects from the devaluation in November 2016; similarly, Turkey’s inflation swing can be partly explained by lira weakness in the last quarter of 2016, while Poland’s swing is in some ways a positive given that they were suffering from deflation over 2016. Looking out to 2018, Egypt should see inflation return to more normal levels.
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The Focal Point
Figure 108: Brazil, Colombia and Russia have the best disinflation stories over 2017
chg in inflation, 16-17E chg in inflation, 17-18E 14 12 10 8 6 4 2 0 -2 -4
-6
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Korea
Czech
Russia
Turkey
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia Philippines South Africa South Source: IMF, Renaissance Capital
In Frontier, Argentina and Nigeria have the highest forecast inflation over 2017, though for Argentina, this is somewhat moderated by the fact that inflation is projected to roughly halve over the next two years. For Nigeria, our SSA Economist Yvonne Mhango expects inflation to moderate to 15.7% over 2017 and 13.1% over 2018. Kazakhstan’s 8% inflation over 2017, while high, is a significant fall from 15% over 2016, and is expected to moderate further, with CIS Economist Oleg Kouzmin’s numbers in line with IMF forecasts.
Figure 109: Argentina and Nigeria have the highest inflation in FM and Beyond Inflation, average (% YoY) 2016 2017E 2018E 40 35 30 25 20 15 10 5 0
-5
Iran
Oman
Kenya
Serbia
Kuwait
Ghana
Jordan
Nigeria
Tunisia Croatia
Estonia Zambia
Bahrain Ukraine
Uganda
Georgia
Vietnam Senegal Rwanda
Pakistan Slovenia Morocco
Lebanon
Romania
Mauritius Lithuania
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Source: IMF, Renaissance Capital
In terms of disinflation stories, Argentina, Kazakhstan, Zambia and Ghana seem to offer the best prospects; however, for much of Frontier, reflation is more the key, with Lebanon, Jordan, Romania and Croatia seeing inflation return to positive territory.
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The Focal Point
Figure 110: Argentina, Kazakhstan have the best disinflation stories over 2017
chg in inflation, 16-17E chg in inflation, 17-18E 6 4 2 0 -2 -4 -6 -8 -10
-12
Iran
Oman
Kenya
Serbia
Kuwait
Ghana
Jordan
Nigeria
Croatia Tunisia
Estonia Zambia
Bahrain Ukraine
Uganda
Georgia
Vietnam Senegal Rwanda
Morocco
Slovenia Pakistan
Lebanon
Romania
Mauritius
Lithuania
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Source: IMF, Renaissance Capital
Who’s investing the most?
In our piece on the middle-income trap, we found that countries that invest substantially (30% of GDP or more) tend to grow faster and converge to DM levels. In EM, Qatar, China, Indonesia and India, are the biggest investors, devoting over 30% of GDP to investment (though Qatar is somewhat exceptional), which bodes well for improving per capita output. At the bottom of the scale are Greece, Egypt, Brazil, and South Africa, where investment to GDP is below 20%.
Figure 111: Qatar, China and Indonesia are the biggest investors in EM… Total investment (% GDP) 2017E 2018E 60
50
40
30
20
10
0
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Korea
Czech
Turkey Russia
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia Philippines South Africa South Source: IMF, Renaissance Capital
In Frontier, Oman, Morocco, Sri Lanka and Bangladesh are the biggest investors; further afield, Zambia, Georgia and Iran are also devoting at least 30% of GDP to investment. At the other end of the scale, Nigeria, Argentina, Pakistan and Zimbabwe are particularly disappointing, devoting less than 20% of GDP to investment despite their low income levels. Kenya is also a disappointment, with investment to GDP of just 18% and low domestic savings.
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The Focal Point
Figure 112: Oman, Morocco, Sri Lanka and Bangladesh are the biggest investors in Frontier…
Total investment (% GDP) 2017E 2018E 45 40 35 30 25 20 15 10 5
0
Iran
Oman
Kenya
Serbia
Kuwait
Ghana
Jordan
Nigeria
Tunisia Croatia
Estonia Zambia
Bahrain Ukraine
Uganda
Georgia
Senegal Vietnam Rwanda
Morocco Slovenia Pakistan
Lebanon
Romania
Mauritius
Lithuania
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi
Source: IMF, Renaissance Capital
Trading nations
Where are the big trading nations? Czech Republic and Hungary are the biggest exporters relative to GDP in EM, followed by Malaysia and Taiwan. On the other end of the scale, Egypt, Brazil and Colombia are the least dependent on exports.
Figure 113: EM Exports to GDP, 2016
Exports to GDP 90% 80% 70% 60% 50% 40% 30% 20% 10%
0%
UAE
Peru
India
Chile
Qatar Brazil
Egypt
China
Korea
Russia Turkey
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia
Philippines
South Africa South Czech Republic Czech
Note: based on reported exports by origin country and reported imports by destination country Source: IMF, Renaissance Capital Estimates
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The Focal Point
Focusing on commodity exports, Qatar and Russia are the largest net commodity exporters relative to GDP, while Thailand, Korea and Taiwan are the largest net importers.
Figure 114: EM net commodity exports to GDP, 2015
45% Net commodity (fuels and mining products) exports, 2015 40% 35% 30% 25% 20% 15% 10% 5% 0% -5%
-10%
UAE
Peru
India
Chile
Qatar Brazil
Egypt
China
Korea
Russia Turkey
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia
Philippines South Africa South
Czech Republic Czech Source: WTO, Renaissance Capital Estimates
In Frontier, Oman, Vietnam and Slovenia come at the top, while Lebanon, Pakistan and Nigeria export the least. Among the Beyond Frontier countries, Zambia exports the most relative to its GDP, while Rwanda exports the least.
Figure 115: FM Exports to GDP, 2016
Exports to GDP 120%
100%
80%
60%
40%
20%
0%
Iran
Oman
Kenya
Serbia
Kuwait
Ghana
Jordan
Nigeria
Tunisia Croatia
Zambia
Estonia
Bahrain Ukraine
Uganda
Georgia
Vietnam Senegal Rwanda
Slovenia Morocco Pakistan
Lebanon
Romania
Lithuania Mauritius
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Note: based on reported exports by origin country and reported imports by destination country Source: IMF, Renaissance Capital Estimates
60 Renaissance Capital 12 June 2017
The Focal Point
Kuwait, Oman and Kazakhstan are the largest net commodity exporters relative to GDP, while Jordan, Lebanon and Morocco import the least. Among the Beyond Frontier countries, Saudi Arabia is the largest net commodity exporter, while Tanzania, Ukraine and Georgia are the largest importers.
Figure 116: FM net commodity exports to GDP, 2015
Net commodity (fuels and mining products) exports, 2015 50%
40%
30%
20%
10%
0%
-10%
-20%
Iran
Oman
Kenya
Serbia
Kuwait
Ghana
Jordan
Nigeria
Croatia Tunisia
Estonia Zambia
Bahrain Ukraine
Uganda
Georgia
Vietnam Senegal Rwanda
Slovenia Pakistan Morocco
Lebanon
Romania
Mauritius
Lithuania
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Source: WTO, Renaissance Capital Estimates
Mind the gap – budget and external balances
Korea has the strongest position in terms of its fiscal and external balances, as the only EM country forecast to run a budget surplus (0.8% of GDP) and a current account surplus (6.2% of GDP). Czech Republic, with a modest budget deficit and current account surplus also looks quite safe. Egypt’s twin deficits are a little worrying, as are Turkey’s, though for Egypt, a weaker currency should see some improvement on the external side and fiscal reform should improve the large deficit. India and Brazil also have large budget deficits, and while their external deficits are modest, these will need to be addressed.
Figure 117: External balance vs fiscal balance, EM Current account balance (% GDP) vs fiscal balance (% GDP), 2017E 20 Safe 15 Taiwan
10 Thailand
Korea 5 Hungary Russia UAE Malaysia ChinaQatar Czech 0 GreecePhilippines Brazil India Chile PolandPeru MexicoIndonesia
Current account balance, % GDP% balance, account Current South Africa Colombia -5 Egypt Turkey Risky -10 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 Fiscal balance, % GDP Source: IMF, Renaissance Capital
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In Frontier, Kuwait, Iran and Estonia are forecast to run twin surpluses, while Slovenia and Croatia show only modest budget deficits and current account surpluses. At the other end of the scale, Lebanon and Oman have the worst twin deficits (though in Lebanon’s case, a large current account deficit is in keeping with its status as a large off-shore financial centre, much like Georgia). Zambia and Kenya also have worryingly large budget and current account deficits, while Saudi Arabia’s large budget deficit should continue to be a catalyst for reform.
Figure 118: External balance vs fiscal balance, FM Current account balance (% GDP) vs fiscal balance (% GDP), 2017E 10 Kuwait Safe 5 Slovenia Iran Vietnam Croatia Saudi Arabia Nigeria Estonia 0 Zimbabwe Bangladesh Pakistan Romania Lithuania Zambia Argentina Morocco Bahrain Sri Lanka Serbia -5 Kazakhstan Ivory CoastUkraine Kenya Ghana Uganda TanzaniaSenegal Tunisia Mauritius -10 Jordan Rwanda
Oman Georgia Current account balance, % GDP% balance, account Current -15 Lebanon
Risky -20 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 Fiscal balance, % GDP Source: IMF, Renaissance Capital
What about the debt burden?
Greece, Taiwan, Korea and China seem the most encumbered by debt in EM, with combined private and public debt ratios in excess of 200% of GDP; with the exception of Greece, the majority of this is due to private lending rather than government borrowing, suggesting some support from the sovereign should a debt crisis ensue. Peru, Indonesia and Russia offer more of a lending story, with lower levels of private credit and government debt.
Figure 119: Private and government debt to GDP
350% Private credit to GDP, 2016 Govt debt to GDP,2016
300%
250%
200%
150%
100%
50%
0%
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Korea
Czech
Turkey Russia
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia Philippines
South Africa South Source: IMF, Renaissance Capital
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On the external debt side, barring Greece, whose problems are well known, Hungary looks a little vulnerable, with external debt of over 100% of GDP, though this has fallen substantially from its peak of 184% in 2009 and a large part is due to FDI related inter- company lending. China, despite its high domestic debt burden, Egypt and India look safest from this perspective.
Figure 120: External debt to GDP, 2016
200% 180% 160% 140% 120% 100% 80% 60% 40% 20%
0%
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Korea
Czech
Russia
Turkey
Poland
Mexico
Taiwan
Greece
Hungary
Thailand
Malaysia
Colombia
Indonesia Philippines
South Africa South Source: IMF, Renaissance Capital
In Frontier, Lebanon, Bahrain and Vietnam have the largest debt burdens, while Nigeria, Kazakhstan and Argentina have room for credit to expand.
Figure 121: Private and government debt to GDP
Private credit to GDP, 2016 Govt debt to GDP,2016 250%
200%
150%
100%
50%
0%
Oman
Kenya
Serbia
Kuwait
Jordan
Nigeria
Croatia Tunisia
Zambia
Estonia
Bahrain
Uganda
Georgia
Vietnam Senegal Bulgaria
Morocco Slovenia Pakistan
Lebanon
Romania
Mauritius
Lithuania
Tanzania
Sri Lanka Sri
Argentina
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Source: IMF, Renaissance Capital
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On the external debt side, excluding Mauritius, whose debt figures are distorted by very high intercompany lending, Bahrain and Kazakhstan have the highest external debt burdens, though Kazakhstan also boasts a $67bn (50% of GDP) sovereign wealth fund, while Nigeria, Bangladesh and Kuwait have the lowest.
Figure 122: External debt to GDP, 2016
200% 180% 160% 140% 120% 100% 80% 60% 40% 20%
0%
Iran
Oman
Kenya
Serbia
Kuwait
Ghana
Jordan
Nigeria
Croatia Tunisia
Estonia Zambia
Ukraine
Bahrain
Uganda
Georgia
Vietnam Rwanda
Senegal
Slovenia Morocco Pakistan
Lebanon
Romania
Mauritius Lithuania
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Source: IMF, Renaissance Capital
Where are the earnings?
Using bottom-up, calendarised EPS forecasts (which differ from headline numbers in excluding negative earnings), EM is forecast to grow its earnings by 16% over 2017 and 12% over 2018; Frontier will see lower growth of 15% over 2017 and 6% over 2018 (however, this should be taken with a note of caution as many frontier stocks lack analyst forecasts). By country, we see that Mexico and South Korea have the highest EPS growth forecasts for 2017, while the Czech Republic and Hungary are forecast to have earnings contractions. In Frontier, Kuwait, Argentina and Kazakhstan have the highest growth, though Kuwait is something of a one-off owing to depressed 2016 earnings (and there is a history of earnings misses in this market). At the bottom end of the scale, Lebanon, Oman and Bahrain are set to see the deepest earnings contractions.
Figure 123: MSCI EM EPS growth Figure 124: MSCI Frontier EPS growth 17 EPS growth 18 EPS growth 17 EPS growth 18 EPS growth 70% 50% 60% 40% 50% 30% 40% 30% 20% 20% 10% 10% 0% 0% -10% -10%
-20% -20%
FM
EM
UAE
Peru
India
Chile
Brazil
Qatar
Egypt Oman
China
Kenya
Czech Kuwait
Jordan
Nigeria
Turkey Russia
Croatia
Poland
Mexico Estonia
Taiwan
Greece
Bahrain
Vietnam
Senegal
Pakistan Slovenia Morocco
Lebanon
Hungary
Thailand Romania
Lithuania
Malaysia
Sri Lanka Sri
Argentina
Colombia
Indonesia
Philippines
Kazakhstan
Bangladesh
South Africa South Saudi Arabia Saudi South Korea South Source: MSCI, Bloomberg, Renaissance Capital Source: IMF, Renaissance Capital
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Looking at forecast revisions, EM has seen EPS forecasts for 2017 and 2018 revised modestly upwards over the last three months by roughly 2%, while the revisions balance is slightly negative. Korea, Turkey and Hungary have seen the largest upgrades to 2017 EPS over the past three months, both in terms of the magnitude of forecast changes and the number of analysts upgrading stocks; Greece, Colombia and Russia are showing a bearish movement.
Figure 125: MSCI EM EPS forecast changes -3m Figure 126: MSCI EM revisions balance (net upgrades to total forecasts) – 3m 17E forecast change 18E forecast change 17E revisions balance 18E revisions balance 15% 40%
10% 30% 20% 5% 10% 0% 0%
-5% -10% -20% -10% -30%
-15% -40%
EM EM
UAE UAE
Peru Peru
India India
Chile Chile
Brazil Brazil
Qatar Qatar
Egypt Egypt
China China
Czech Czech
Turkey Russia Turkey Russia
Poland Poland
Mexico Mexico
Taiwan Taiwan
Greece Greece
Hungary Hungary
Thailand Thailand
Malaysia Malaysia
Colombia Colombia
Indonesia Indonesia
Philippines Philippines
South Africa South Africa South South Korea South South Korea South Source: MSCI, Bloomberg, Renaissance Capital Source: IMF, Renaissance Capital
In Frontier, we note a divergence between forecast changes and analyst upgrades for Kuwait, where the large swing in EPS over the past three months is driven by one large stock (Zain). As usual, the lack of coverage for many stocks makes these metrics less reliable than in EM; however, Nigeria is has seen a good swing in terms of EPS forecasts and analysts upgrading their views, while in Pakistan and Morocco the picture is more bearish.
Figure 127: MSCI Frontier EPS forecast changes – 3m Figure 128: MSCI Frontier revisions balance (net upgrades to total forecasts) – 3m 17E forecast change 18E forecast change 25% 17E revisions balance 18E revisions balance 120% 20% 100% 15% 80% 10% 60% 5% 40% 0% 20% -5% 0% -10% -20%
-40%
FM
Kenya
FM
Kuwait
Jordan
Nigeria
Croatia
Estonia
Bahrain
Senegal Vietnam
Slovenia Pakistan Morocco
Lebanon
Romania
Mauritius
Lithuania
Sri Lanka Sri
Kenya
Argentina
Kuwait
Jordan
Nigeria
Croatia
Estonia
Bahrain
Vietnam
Senegal
Kazakhstan
Slovenia Morocco Pakistan
Bangladesh
Lebanon
Romania
Mauritius
Lithuania
Sri Lanka Sri Argentina
Saudi Arabia Saudi
Kazakhstan Bangladesh Arabia Saudi Source: MSCI, Bloomberg, Renaissance Capital Source: IMF, Renaissance Capital
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Looking at EM EPS growth by sector, IT is forecast to see the fastest growth over 2017, followed by telecoms and industrials, while utilities register the worst growth, with earnings expected to contract by 12%.
Figure 129: EM country-sector EPS growth, 2017E (lcl) Cons. Cons. Real Energy Financials Healthcare Industrials IT Materials Telecoms Utilities Overall disc. staples estate Mexico 40.9% 12.6% - 16.6% - 60.3% - 28.4% -42.3% 643.8% -21.6% 39.9% South Korea 4.7% -1.6% 21.4% 13.5% 23.6% 29.4% 83.1% 38.7% - 24.2% -30.2% 37.0% Egypt - - - 25.8% - - - - - 30.3% - 26.6% Colombia - - 151.2% 5.4% - - - 5.7% - - - 26.1% Poland 23.1% 17.3% -6.0% 15.9% - - - 407.8% - - -0.6% 24.5% Peru - - - 7.7% - - - 69.7% - - - 17.8% Turkey 1.3% 36.8% 46.6% 12.6% - 24.6% - 31.4% 7.4% 46.0% - 17.6% Indonesia 24.8% 12.8% 29.0% 16.8% 10.3% 17.4% - -14.0% 24.6% 13.8% 23.1% 16.5% EM 16.7% 6.5% 12.7% 8.1% 10.8% 19.4% 34.4% 20.2% 4.4% 22.5% -11.7% 15.5% Philippines 9.4% -3.7% - 8.3% - 34.1% - - 12.8% 8.1% 5.8% 14.6% China 19.5% 33.0% 139.4% 5.2% 17.3% 11.8% 18.6% 32.7% 5.9% 10.5% 0.5% 13.1% India 59.6% 12.1% -2.0% 16.0% -3.8% 9.2% 0.0% 63.3% - -27.6% 5.5% 13.1% South Africa 34.8% -17.8% 31.7% 7.4% 17.6% 10.4% - 10.1% 16.9% 6.1% - 12.4% Taiwan 2.6% 6.7% -15.4% 8.3% - 29.6% 12.1% -3.0% -24.3% -2.6% - 9.0% Thailand 12.0% 6.0% 22.2% 1.6% 1.2% 7.4% 18.8% 6.7% 9.4% -4.4% 3.6% 8.5% Brazil 7.3% 24.6% 6.6% 7.7% 25.7% 24.2% 0.8% 2.0% 80.3% 16.2% -12.0% 8.2% Qatar - - -1.7% 4.5% - 35.8% - - - 17.6% 6.7% 8.0% Chile 10.5% -17.4% 3.0% 20.9% - 259.2% - 71.3% - -3.3% -8.0% 5.0% UAE - - - 4.8% - 5.7% - - -3.7% 8.0% - 1.5% Russia - -1.2% -4.0% 11.6% - - - -11.9% - 20.3% -18.3% -0.9% Greece -4.8% - - 2.5% - - - -24.7% - 6.4% - -1.7% Malaysia -20.5% 8.4% -8.0% 5.4% 50.7% -13.0% - 19.2% -18.7% 17.0% -17.1% -3.3% Hungary - - -15.0% 3.0% 2.9% ------3.9% Czech - - - -4.6% - - - - - 0.9% -24.3% -11.7% Source: MSCI, Bloomberg
Carrying out the same exercise for Frontier, energy and telecoms are forecast to see the highest EPS growth over 2017, while real estate earnings are forecast to fall.
Figure 130: FM country-sector EPS growth, 2017E (lcl) Cons. Cons. Real Energy Financials Healthcare Industrials IT Materials Telecoms Utilities Overall disc. staples estate Kuwait - - - 17.2% - - - - -13.8% 142.5% - 46.1% Argentina 51.9% - 272.5% 20.1% - - 13.2% - - 47.9% - 29.4% Kazakhstan - - 32.9% 17.3% ------26.9% Vietnam - 20.2% - 0.2% - - - 1.1% 87.2% - -5.4% 20.4% Pakistan - - 42.0% 1.6% - - - 83.6% - - - 20.1% Tunisia - - - 18.8% ------18.8% Bangladesh - - - - 15.8% - - - - 13.4% - 15.3% Frontier 37.6% 25.7% 57.4% 6.7% 19.4% 10.7% 13.2% 5.2% -18.2% 47.4% -6.5% 14.3% Slovenia - - - -6.2% 22.4% ------14.2% Lithuania 13.1% ------13.1% Nigeria - 61.4% 67.2% 6.0% - - - 31.6% - - - 12.0% Croatia - - - - - 22.3% - - - 7.7% - 11.4% Saudi Arabia 0.7% -8.8% 128.1% 3.7% - 37.7% - 26.1% 19.2% 17.1% 67.5% 10.7% Kenya - 7.4% - 3.7% - - - - - 14.8% - 7.4% Estonia -6.6% - - - - 13.8% - - - - - 5.7% Jordan - - - 5.6% ------5.6% Sri Lanka - 6.4% - 3.3% - 6.4% - - - - - 5.2% Morocco - - - 10.1% - - - -8.9% 15.8% -0.2% 6.5% 3.9% Senegal ------3.6% - 3.6% Bahrain - - - -6.0% - - - 63.9% - - - -3.4% Romania - - 61.8% -29.2% ------9.1% -3.7% Lebanon - - - 5.0% - - - - -76.1% - - -4.3% Oman - - - 0.3% - - - -18.9% - -19.4% - -7.6% Mauritius - - - 5.3% - - - - -61.8% - - -17.7% Source: MSCI, Bloomberg
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What about valuations?
Figure 131: MSCI FM, EM and DM 12M fwd P/E (x)
FM FM 5yr avg EM EM 5yr avg DM DM 5yr avg 18 16 14 12 10 8 6 4 2
0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16
May-10 May-11 May-12 May-13 May-14 May-15 May-16 May-17 May-09 Source: MSCI, Bloomberg, Renaissance Capital
With EM is currently trading on a 12M FWD P/E of 12.3x, above its five-year average of 11.1x. Frontier is currently on a 12M FWD P/E of 11.4x, also above its five-year average (10.1x). However, Frontier’s 7% discount to EM is still in line with its five-year average of 8%, while EM’s discount to DM stands at 26% vs an average of 25%.
Figure 132: MSCI Frontier premium/discount to EM Figure 133: MSCI EM premium/discount to DM MSCI FM vs EM Average MSCI EM vs DM Average 20% 20% 10% 10% 0% 0% -10% -10% -20% -20% -30% -30% -40% -40% -50% -50% -60% -60%
-70% -70%
Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-09 Source: MSCI, Bloomberg, Renaissance Capital Source: IMF, Renaissance Capital
By country, Russia is on the lowest multiple of all the EM countries at 5.6x, below its 10- year average of 6.7x. In Frontier, Morocco, Vietnam and Bangladesh command the highest multiples, while Lebanon and Bahrain command the lowest.
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Figure 134: MSCI EM 12M fwd P/E (x) Figure 135: MSCI FM 12M fwd P/E (x) 12M fwd P/E EM 10yr avg 12M fwd P/E FM 10yr avg 25 20 18 20 16 14 15 12 10 10 8 6 5 4 2
0 0
FM
EM
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Oman
Kenya
Czech
Kuwait
Turkey Russia
Nigeria
Poland
Croatia Tunisia
Mexico
Taiwan
Estonia
Greece
Bahrain
Vietnam
Morocco Slovenia Pakistan
Hungary
Lebanon
Thailand
Romania
Malaysia
Mauritius
Sri Lanka Sri
Argentina
Colombia
Indonesia
Philippines
Kazakhstan
Bangladesh
South Africa South South Korea South Arabia Saudi Source: MSCI, Bloomberg, Renaissance Capital Source: MSCI, Bloomberg, Renaissance Capital
Another gauge of valuations is to look at sector-neutral P/Es, to adjust for structural differences between markets. On this measure, Russia still screens as the cheapest market in EM, followed by South Korea and Turkey, while Chile, the Philippines and Malaysia remain are the most expensive. In Frontier, Bahrain, Kazakhstan and Lebanon screen as the cheapest.
Figure 136: MSCI EM sector-neutral 12M fwd P/E (x) Figure 137: MSCI FM sector neutral 12M fwd P/E (x)
SN PE 12M fwd P/E SN PE 12M fwd P/E 25 20 18 20 16 14 15 12 10 10 8 6 5 4 2
0 0
FM
EM
Peru
Oman
Kenya
Qatar Kuwait
Egypt
China
Nigeria
Croatia Tunisia
Czech
Estonia
Mexico
Vietnam
Morocco
Pakistan Slovenia
Lebanon
Romania
Mauritius
Sri Lanka Sri
Argentina
Thailand
Malaysia
Kazakhstan
Bangladesh
Philippines
Saudi Arabia Saudi
South Africa South South Korea South
Source: MSCI, Bloomberg, Renaissance Capital
Source: MSCI, Bloomberg, Renaissance Capital
On a P/B basis, FM and EM are on similar multiples (1.7x) and are somewhat below DM (2.3x); however, Frontier boasts a higher RoE than EM (11.3% vs 10.4%). EM’s RoE has improved in recent months, but has a long way to match previous high points in 2011.
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Figure 138: MSCI FM, EM, DM P/B (x) Figure 139: MSCI FM, EM, DM trailing RoE (%)
FM EM DM FM EM DM 2.5 18 2.3 16 2.1 14 1.9 12 1.7 10 1.5 8 1.3 1.1 6 0.9 4 0.7 2
0.5 0
Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-09 Source: MSCI, Bloomberg, Renaissance Capital Source: IMF, Renaissance Capital
Focusing on dividends, Russia boasts the highest 12M FWD dividend yields in EM at 6.1%. In Frontier, Mauritius, Oman and Kuwait offer the best dividend yields, at 9.5%, 7.3% and 6.2% respectively. In aggregate, Frontier offers higher dividend yields than EM, at 4% vs 2.7%.
Figure 140: MSCI EM 12M fwd dividend yield (%) Figure 141: MSCI FM 12M fwd dividend yield (%)
12M Fwd dvd yld (%) EM 10yr Average 12M Fwd dvd yld (%) FM 10yr Average 7 10 9 6 8 5 7 4 6 5 3 4 2 3 2 1 1
0 0
EM
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
Oman
China
Kenya
Czech
Kuwait
Nigeria
Russia Turkey
Tunisia Croatia
Poland
Mexico
Estonia
Taiwan
Greece
Bahrain Frontier
Vietnam
Slovenia Pakistan Morocco
Lebanon
Hungary
Thailand
Romania
Mauritius
Lithuania
Malaysia
Sri Lanka Sri
Argentina
Colombia
Indonesia
Philippines
Kazakhstan
South Africa South
South Korea South Saudi Arabia Saudi
Source: MSCI, Bloomberg, Renaissance Capital Source: IMF, Renaissance Capital
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Correlation and diversification
Correlations have fallen substantially over the past 12 months, with Frontier exhibiting a 34% correlation with EM and a 32% correlation with DM, suggesting that the diversification element of Frontier may be returning. Additionally, EM has decoupled from DM, with correlations falling from close to 90% in in September 2016 to just 54%, suggesting that local factors are becoming more important than global drivers.
Figure 142: MSCI index rolling 52-week correlations FM to EM FM to DM EM to DM 100%
80%
60%
40%
20%
0%
-20%
-40%
Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-05 Source: MSCI, Bloomberg, Renaissance Capital
Flows and positioning
EM equities have seen almost $28bn in inflows YtD. By contrast, frontier funds have seen outflows of $0.4bn over the year to 30 April.
Figure 143: EM equity fund inflows, $mn Figure 144: Frontier equity fund inflows, $mn (monthly, to 30 April 2017) 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 5,000 40,000 4,000 20,000 3,000
0 2,000
-20,000 1,000 0 -40,000 -1,000 -60,000 -2,000
-80,000 -3,000
Jul
Apr Oct
Jul
Jan Jun
Feb Mar
Nov Dec
Aug Sep
Apr Oct
May
Jan Jun
Mar
Feb
Aug Sep Nov Dec May
Source: EPFR, Renaissance Capital Source: EPFR, Renaissance Capital
Looking more closely at the inflows, we see that ETFs have captured the roughly 75% of the total since the beginning of the year, which perhaps explains why Frontier has lagged given the lack of passive or exchange-traded investment vehicles (only $2bn, or 10%, of Frontier AuM is passive, vs $322bn, or 26%, of EM AuM). One positive we would note is that higher frequency data (which captures roughly 50% of Frontier funds by assets) shows inflows over May, which could indicate a turning point.
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Figure 145: EM equity fund inflows by fund type (past 52 weeks), $mn Figure 146: Frontier equity fund inflows (past 52 weeks), $mn Non-ETF ETF Total FM Weekly flows, $mn FM Weekly flows, % of AuM (RHS) 6,000 100 1.0
4,000 50 0.5 2,000 0 0.0 0 -50 -0.5 -2,000
-4,000 -100 -1.0
-6,000 -150 -1.5
6-Jul-16
8-Jun-16 4-Jan-17
6-Jul-16
1-Feb-17 1-Mar-17
3-Aug-16 9-Nov-16 7-Dec-16
20-Jul-16
8-Jun-16 4-Jan-17
12-Oct-16 26-Oct-16 12-Apr-17 26-Apr-17 1-Mar-17
1-Feb-17
9-Nov-16 7-Dec-16
22-Jun-16 18-Jan-17 3-Aug-16
20-Jul-16
15-Feb-17 15-Mar-17 29-Mar-17
17-Aug-16 31-Aug-16 14-Sep-16 28-Sep-16 23-Nov-16 21-Dec-16
25-May-16 10-May-17 24-May-17
12-Oct-16 26-Oct-16 12-Apr-17 26-Apr-17
22-Jun-16 18-Jan-17
15-Mar-17 29-Mar-17
15-Feb-17
17-Aug-16 31-Aug-16 14-Sep-16 28-Sep-16 23-Nov-16 21-Dec-16
10-May-17 24-May-17 25-May-16 Source: EPFR, Renaissance Capital Source: EPFR, Renaissance Capital
Frontier AuM has come down since its peak in April 2015 of $24bn. Adding up dedicated global and regional frontier funds, we find $18.2bn of dedicated Frontier AuM. We can add to this another $2.7bn of money in mainstream GEM funds allocated to Frontier countries, bringing the total to $20.9bn. To this we can add a further $1.2bn in Africa regional funds, bringing us to a potential total of $22.6bn (with the caveat that some Africa-regional funds include South Africa and Egypt in their remit). This figure only includes publicly available funds, so clearly it does not capture investments via segregated mandates, pensions or direct investments by pension funds, insurance companies, sovereign wealth funds, hedge funds and individuals.
Figure 147: Frontier AuM, $mn Figure 148: FM fund assets, April 2017
Global Frontier Regional Frontier in mainstream GEM funds 25,000 Frontier in mainstream LatAm GEM funds 2% 20,000 13%
Global 15,000 Frontier Asia 43% 19% 10,000
5,000
EMEA
0 23%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2001 Source: EPFR, Renaissance Capital Source: EPFR, Renaissance Capital
How are funds positioned?
Based on a sample of active FM funds benchmarked to MSCI, we can see that FM funds tend to be index-agnostic. Pakistan is a key overweight, as are Bangladesh and Sri Lanka, but off-index positions dominate, with UAE, Egypt, Saudi Arabia and Georgia accounting for 22%. In addition, a number of Frontier countries have zero allocation, including Mauritius and Bahrain.
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Figure 149: FM funds country OW/UW, April 2017
Underweights (Apr-17) Overweights (Apr-17) Index weights (Apr-17)
20
15
10
5
0
UAE
RoW
Cash
Egypt
Oman
Kenya
Serbia
Kuwait
Jordan
Nigeria
Tunisia Croatia
Estonia
Ukraine Bahrain
Georgia
Vietnam
Senegal
Pakistan Morocco Slovenia
Lebanon
Romania
Mauritius
Lithuania
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Ivory Coast Ivory
Kazakhstan Bangladesh Saudi Arabia Saudi Note: Based on sample of non-ETF funds benchmarked to MSCI FM. Source: EPFR, Renaissance Capital
By contrast, EM funds tend to hug the benchmark more closely, with off-index allocations amounting to 9%. Key OWs include India, Brazil and Russia, while the main UWs are China, Taiwan and South Korea. Interestingly, Pakistan accounted for 0.1% of GEM funds, which is in line with its weight post-May rebalancing; however, only 12% of MSCI benchmarked active GEM funds have positions in Pakistan, considering only funds that hold positions in Pakistan, its effective weight is 1.4%.
Figure 150: GEM funds country OW/UW, April 2017
Underweights (Apr-17) Overweights (Apr-17) Index weights (Apr-17)
25
20
15
10
5
0
UK
UAE USA
Peru
India
RoW
Chile
Cash
Brazil
Qatar
Egypt
China
Japan
Czech Kenya
Ghana
Russia
Turkey Jordan
Poland Austria
Mexico Nigeria
Taiwan
Greece
Norway
Sweden
Vietnam
Portugal Panama
Hungary
Thailand Pakistan
Malaysia
Romania
Colombia
Argentina
Indonesia
Singapore
Other Asia Other
Philippines
Netherlands
South Africa South
South Korea South Equity Other
Other EMEA Other Saudi Arabia Saudi Other Europe Other
Source: EPFR, Renaissance Capital
The following charts show the most recent sector allocations for non-ETF GEM funds benchmarked to the MSCI EM vs the sector weights of the index, and the evolution of OW/UW of cyclical vs defensive sectors vs their weight in the index (calculated as weight of sectors in fund minus weight of sector in index, in percentage points and based on c. 40% of MSCI EM-benchmarked active AuM).
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Figure 151: GEM funds sector OW/UW, April 2017 Figure 152: Cyclicals vs defensives positioning in active GEM funds, ppts
Overweight (Apr-17) Underweight (Apr-17) Index weight (Apr-17) 5% Cyclicals Defensives 30% 4% 25% 3%
20% 2% 1% 15% 0% 10% -1% 5% -2% -3% 0%
IT -4% Energy
Utilities -5%
Materials
Telecoms
Financials
Industrials
Healthcare
Cons. Disc. Cons.
Real Estate Real
Cons. Staples Cons.
Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-07 Note: Based on sample of Non-ETF funds benchmarked to MSCI Emerging Markets Index. Note: Based on sample of Non-ETF funds benchmarked to MSCI Emerging Markets Index. Positioning is defined as Source: EPFR, Renaissance Capital (weight of sector in fund) – (weight of sector in benchmark index).
Cyclicals = Cons. Disc., Financials, Industrials, IT, Materials, Real Estate. Defensives = Cons. Staples, Healthcare, Energy, Telecoms, Utilities. Source: EPFR, Renaissance Capital
See pages 87 to 94 for charts on historical allocations to EM countries in GEM funds.
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Liquidity – the main challenge in Frontier
Figure 153: Frontier local index aggregate 3MADTV vs EM aggregate 3MADTV, $mn (includes DRs for Argentina)
Frontier 3MADTV, $bn EM 3MADTV, $bn (RHS) 1.2 25
1.0 20
0.8 15 0.6 10 0.4
5 0.2
0.0 0
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, Bloomberg, Renaissance Capital
Liquidity in Frontier has fallen a long way from its peak in 2008, currently trading $490mn a day vs a peak of $1bn a day; however, liquidity has improved substantially in recent months. EM liquidity has also been picking up, with turnover currently $16.3bn per day, up from $13bn per day in March 2016; however, liquidity is only in line with the average over the past five years.
Volumes have been particularly strong in Vietnam and Bangladesh, while Pakistan has hit highs not seen since May 2015. Kuwait has seen turnover pick up, though it remains some way from its previous highs. Argentina (including ADRs) has seen also liquidity recover, though not yet at 2014 levels. Saudi Arabia’s liquidity is still substantially below a peak of $2.2bn per day, and recent trends have not been promising.
Figure 154: Frontier local index aggregate 3MADTV (includes DRs for Argentina)
3MADTV, $mn, current 3MADTV, $mn, 18 May 15 3MADTV, $mn, 28 April 14 180 808 160 140 120 100 80 60 40 20
0
Oman
Kenya
Serbia
Kuwait
Ghana
Jordan
Nigeria
Croatia Tunisia
Estonia Zambia
Bahrain
Uganda
Georgia
Vietnam Rwanda
WAEMU WAEMU
Pakistan Morocco Slovenia
Lebanon
Romania
Mauritius
Lithuania
Tanzania
Sri Lanka Sri
Argentina
Zimbabwe
Kazakhstan Bangladesh Saudi Arabia Saudi Source: MSCI, Bloomberg, Renaissance Capital
Pakistan’s transition puts pressure on liquidity, and should Argentina also transition to EM, aggregate liquidity will fall to just $320mn per day.
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Looking across Frontier, we find a total of 275 stocks that trade above $1mn a day (132 excluding Saudi Arabia), concentrated in Vietnam, Pakistan and Bangladesh.
Figure 155: Frontier liquidity cascade 3MADTV ($mn) > 0.1 3MADTV ($mn) > 0.2 3MADTV ($mn) > 0.5 3MADTV ($mn) > 1 3MADTV ($mn) > 2 3MADTV ($mn) > 5 3MADTV ($mn) > 10 TOTAL 686 TOTAL 543 TOTAL 404 TOTAL 275 TOTAL 153 TOTAL 36 TOTAL 12 Saudi Arabia 165 Saudi Arabia 164 Saudi Arabia 161 Saudi Arabia 143 Saudi Arabia 97 Saudi Arabia 23 Saudi Arabia 9 Vietnam 96 Vietnam 80 Vietnam 59 Vietnam 40 Pakistan 19 Argentina 5 Argentina 3 Pakistan 96 Pakistan 77 Pakistan 55 Pakistan 35 Vietnam 16 Pakistan 4 Bangladesh 77 Bangladesh 63 Bangladesh 34 Bangladesh 18 Kuwait 7 Vietnam 2 Kuwait 59 Kuwait 43 Kuwait 30 Kuwait 13 Argentina 7 Kuwait 2 Oman 33 Argentina 24 Argentina 14 Argentina 7 Bangladesh 3 Argentina 30 Oman 15 Oman 8 Romania 3 Romania 1 Morocco 25 Morocco 14 Morocco 7 Morocco 3 Kenya 1 Romania 14 Nigeria 10 Jordan 7 Sri Lanka 2 Kazakhstan 1 Nigeria 14 Romania 9 Romania 6 Nigeria 2 Georgia 1 Jordan 13 Jordan 9 Nigeria 5 Lebanon 2 Sri Lanka 11 Sri Lanka 4 Kenya 4 Kazakhstan 2 Kenya 9 Lebanon 4 Kazakhstan 4 Georgia 2 Bahrain 7 Kenya 4 Sri Lanka 2 Oman 1 Kazakhstan 6 Kazakhstan 4 Lebanon 2 Kenya 1 Slovenia 5 Croatia 4 Georgia 2 Jordan 1 Croatia 5 Bahrain 4 Mauritius 1 Mauritius 4 Mauritius 3 Croatia 1 Lebanon 4 Zimbabwe 2 WAEMU 1 Zimbabwe 3 Georgia 2 Bahrain 1 Tunisia 3 Tunisia 1 Zambia 2 Tanzania 1 Georgia 2 Slovenia 1 WAEMU 2 WAEMU 1 Tanzania 1 Source: MSCI, Bloomberg, Renaissance Capital
Index transitions
With Pakistan having transitioned to MSCI EM, Argentina, Kuwait and Vietnam are the three largest countries; however, with Argentina currently under review for transition to MSCI EM and Nigeria under review for removal from Frontier, there is a chance the index could change dramatically in the coming months.
Figure 156: MSCI EM post-Pakistan’s transition Figure 157: Frontier post-Pakistan’s transition China (28%) Argentina (21%) MSCI EM post May 2017 rebalancing Korea (16%) Frontier post May 2017 Rebalancing Kuwait (18%) Taiwan (12%) Vietnam (9.9%) India (8.9%) Nigeria (7.9%) Brazil (6.9%) Morocco (7.9%) South Africa (6.8%) Kenya (4.9%) Mexico (3.5%) Bahrain (4.4%) Russia (3.4%) Romania (4.2%) Indonesia (2.4%) Mauritius (3.6%) Malaysia (2.4%) Oman (3.6%) Thailand (2.2%) Lebanon (2.8%) Poland (1.3%) Bangladesh (2.5%) Philippines (1.2%) Kazakhstan (1.9%) Chile (1.2%) Slovenia (1.6%) Turkey (1.1%) Sri Lanka (1.5%) UAE (0.7%) Croatia (1.5%) Qatar (0.7%) Jordan (1.4%) Colombia (0.5%) Senegal (0.9%) Greece (0.4%) Tunisia (0.4%) Peru (0.4%) Estonia (0.4%) Hungary (0.3%) Czech (0.2%) Ivory Coast (0.2%) Pakistan (0.1%) Serbia (0.2%) Lithuania (0.1%) Egypt (0.1%) Source: IMF, Renaissance Capital Source: MSCI, Bloomberg, Renaissance Capital
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Should both of these changes go ahead (though Nigeria’s removal is not our base case), Kuwait would account for 25% of the index, followed by Morocco (14%) and Vietnam (11%). In EM, Argentina would be 0.5% of the index.
Figure 158: Frontier assuming Argentina is upgraded and Nigeria removed Figure 159: EM including Argentina Kuwait (25%) China (28%) Frontier ex Argentina and Nigeria Vietnam (14%) MSCI EM weights including Argentina Korea (15%) Morocco (11.1%) Taiwan (12%) India (8.9%) Kenya (6.9%) Brazil (6.8%) Bahrain (6.2%) South Africa (6.8%) Romania (5.9%) Mexico (3.5%) Mauritius (5.1%) Russia (3.3%) Oman (5.0%) Indonesia (2.4%) Malaysia (2.4%) Lebanon (4.0%) Thailand (2.1%) Bangladesh (3.4%) Poland (1.3%) Kazakhstan (2.6%) Philippines (1.2%) Slovenia (2.2%) Chile (1.2%) Sri Lanka (2.1%) Turkey (1.1%) UAE (0.7%) Croatia (2.0%) Qatar (0.7%) Jordan (1.9%) Argentina (0.5%) Senegal (1.2%) Colombia (0.5%) Tunisia (0.6%) Greece (0.4%) Estonia (0.5%) Peru (0.4%) Hungary (0.3%) Ivory Coast (0.3%) Czech (0.2%) Serbia (0.3%) Pakistan (0.1%) Lithuania (0.2%) Egypt (0.1%) Source: MSCI, Bloomberg, Renaissance Capital Source: IMF, Renaissance Capital
Our examination of 21 countries included in the EM Index since 1990 suggests that in the 18 months prior to index inclusion, outperformance tended to be strong, right up to the date of inclusion, with little outperformance post inclusion (Figure 160).
Figure 160: Average outperformance before and after inclusion into MSCI EM, dollar-terms performance vs EM
US$ perf rel EM 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -18M -15M -12M -9M -6M -3M 3M 6M 9M 12M 15M 18M Note: Based on average outperformance of 21 countries included in the EM index since 1990. X-axis shows months before and after date of inclusion. Performance is measured from date shown until MSCI entry for negative values; from MSCI entry over the number of months shown for positive values Source: Bloomberg
76 Renaissance Capital Playing by the rules 12 June 2017
The Focal Point
Over the past two years, we have looked at a number of drivers of EM returns, and have highlighted factors such as growth acceleration, currency valuation, credit acceleration and credit rating upgrades. In this edition, we look at the effects of rate cuts and rate hikes, and combine the results of our previous research to see which countries in EM and Frontier look relatively better or worse. In EMEA, Greece, Russia and Turkey screen well, while Qatar and UAE screen poorly; in Frontier, Kazakhstan and Argentina screen well, while the gulf trio of Saudi Arabia, Kuwait and Oman screen worst. Looking out to 2018, Egypt and Turkey screen particularly well in EMEA, while Qatar looks worse; in Frontier, Kazakhstan still screens well, while the gulf states screen better.
Figure 161: Model scores – EM EMEA Figure 162: Model scores – Frontier
Score - using 2017 Growth Score - using 2018 Growth Score - using 2017 Growth Score - using 2018 Growth 4.0 4.0 3.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 -1.0 -1.0 -2.0 -2.0 -3.0 -3.0 -4.0 -4.0
-5.0
UAE
Qatar
Egypt
Russia Turkey
Poland
Greece
Hungary
Oman
Kenya
Kuwait
Jordan
Nigeria
Vietnam
Morocco Pakistan
Romania
South Africa South
Sri Lanka Sri
Argentina
Kazakhstan
Bangladesh
Czech Republic Czech Saudi Arabia Saudi
Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
According to Bastard Operator from Hell author Simon Travaglia, knowing the rules and remembering the rules are two completely different things. For an EM investor, one might add to this the issue of finding any rules to begin with. In our pieces on what factors have driven EM returns, we managed to identify a few key things that seem to have worked well historically and outlined a simple model for county allocation based on acceleration in real GDP growth, REER currency valuation, credit growth acceleration and credit rating upgrades.
Looking at what else works
This time around, we extend the model to look at rate cuts. Initially, we worried that this might give mixed results – there are such things as ‘bad’ rate cuts e.g. in countries where central banks lack independence, lower interest rates might be used for political purposes to engineer a credit bubble and direct funds to inefficient enterprises; additionally, lower rates could disincentivise savers, which can be negative for EM economies that need to build pools of savings to finance investment. And rate hikes are not necessarily a bad thing – in economies where growth is accelerating year after year, a steady path of rising rates is consistent with keeping prices stable and ensuring capital is adequately rationed.
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Figure 163: Market performance vs interest rate changes
Market performance, log returns, vs interest rate changes, ppts 150%
100%
50%
0%
-50%
-100% Market performance (log returns) (log performance Market -150%
-200% -20% -15% -10% -5% 0% 5% 10% 15% 20% Interest changes (policy rate or equivalent), ppts Note: interest rates are policy rates or short-term lending rates where available. Data is from 31 countries across 21 years, excluding outliers Source: IMF, MSCI, Bloomberg, Renaissance Capital
As Figure 163 shows, there is an inverse relationship between rate changes and market performance, suggesting that each percentage point cut in rates is on average associated with a 4.4-ppt improvement in annual performance.
We can further test this by simulating portfolios formed of countries cutting rates or raising rates and testing them against an equally-weighted EM portfolio.
As Figure 164 shows, cutting countries strongly outperform the equal weighted portfolio by 6 ppts per year on average. Hikers, on the other hand, underperform the equal- weighted portfolio by 12 ppts per year on average.
Figure 164: Rate cuts vs rate hikes vs EM equal-weight (log scale)
EM (equal-weight) Rate cuts Rate hikes 1,280
640
320
160
80
40
20
10
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: IMF, MSCI, Bloomberg, Renaissance Capital
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Rate cuts and growth slowdowns
The following table shows the average performance across EM countries under different combinations of rate changes and growth slowdowns/accelerations. Rate cuts dominate in terms of performance in almost every growth acceleration/slowdown scenario.
Figure 165: Rate cuts vs rate hikes vs EM equal-weight (log scale) >4ppts 3-4 ppts 2-3 ppts 1-2 ppts 0-1 ppts 0-1 ppts 1-2 ppts 2-3 ppts 3-4 ppts >4 ppts growth growth growth growth growth growth growth growth growth growth Overall fall fall fall fall fall rise rise rise rise rise >400 bps hike -18% -74% -34% -67% -46% 4% -11% na na na -27% 200 to 400 bps hike -17% na -26% -1% 9% -25% -33% 14% na 9% -8% 100 to 200 bps hike -6% -74% -31% -10% -3% -4% 31% -7% na 54% 2% 50 to 100 bps hike 4% -26% 7% 16% 10% 9% 20% -4% na 29% 11% 0 to 50 bps hike 4% -10% -37% -23% 6% 15% 17% -21% -15% -8% 0% 0 to 50 bps cut 2% -30% 0% 8% -3% 28% 11% 9% -8% 16% 9% 50 to 100 bps cut 9% -1% 14% 19% 13% -9% 31% 38% na 13% 13% 100 to 200 bps cut 14% 16% 6% 30% 1% 4% 20% 45% 31% 35% 16% 200 to 400 bps cut 23% 10% 25% 4% 34% 26% 47% 75% 22% 42% 27% > 400 bps cut 58% -18% 44% 53% 51% 15% 54% 27% -14% 138% 44% Overall 12% -17% 3% 11% 6% 12% 22% 19% 5% 32%
Source: IMF, MSCI, Bloomberg, Renaissance Capital
Putting it all together
We combine the results from our previous work with our insights from looking at rate hikes to create a new scoring system for EM and Frontier economies. We take each country and look at their performance on each factor, giving them a score from -1 to +1. We then simulated a portfolio of the top 20% of scores and the bottom 20% of scores to compare them to an equally-weighted EM portfolio.
Figure 166: Model performance – top quintile vs bottom quintile vs MSCI EM (Equal weight) (log scale)
Performance: top quintile Performance: bottom quintile MSCI EM (Equal weight) 5,120
1,280
320
80
20
5
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1995 Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
As Figure 166 shows, the top quintile dramatically out performs MSCI EM by 11 ppts per year on average.
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Degrees of difference
Our previous model was binary in nature, and took no account of, for example, how much growth acceleration there was in a given year. Intuitively, one would think that a 10-ppt swing in real GDP growth should be much more important than a 1-ppt swing. To capture this, we modified our scoring system to allow more nuance. To show the effect, we run our simulated portfolios (equal-weighted, consisting of countries scoring in the top 20%)
Figure 167: Model performance – old scoring system vs new scoring system vs MSCI EM (equal weight) (log scale)
New scoring system Old scoring system MSCI EM (Equal weight) 6,400
3,200
1,600
800
400
200
100
50
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1995 Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
Scoring EM and Frontier
In EMEA, Greece and Russia screen particularly well, with Hungary and Egypt lower down on the scale. For Greece, this is very much dependent on the assumptions regarding growth rebounding and credit accelerating, as well as our base case of a ratings upgrade, so we would not regard this as definitive. Russia screens well thanks to its ongoing rebound in growth and accelerating lending and a central bank committed to delivering rate cuts as the disinflation story continues; one risk is its currency is expensive on an REER basis. Turkey screens well, boosted by its strong credit growth and potential for rate cuts to further stimulate the economy, Egypt scores poorly on growth and credit, but there could be a possibility for it to perform well in 2018 once the effects of last year’s devaluation have fully worked through. On the other end, UAE screens worst, with slowing growth and credit, an expensive currency and likely rate hikes given the current Fed hiking cycle, while Qatar’s rating downgrade, rate hikes and expensive currency more than offset a good growth acceleration story.
Figure 168: MSCI EM EMEA countries – model scores Growth Lending REER Score – using Country Rating Rates score score score 2017 growth Greece 0.9 0.7 0.0 1.0 0.0 2.6 Russia 0.9 0.9 -0.6 0.0 1.0 2.2 Turkey -0.6 0.8 0.0 0.0 1.0 1.2 Egypt -0.9 -1.0 1.0 1.0 1.0 1.1 Hungary 0.8 1.0 -0.4 0.0 -1.0 0.4 South Africa 0.6 0.0 0.2 -1.0 0.0 -0.2 Czech Republic 0.5 0.0 -0.8 1.0 -1.0 -0.3 Poland 0.6 0.0 -0.2 0.0 -1.0 -0.6 Qatar 0.7 0.0 -0.8 -1.0 -1.0 -2.1 UAE -1.0 -0.7 -0.6 0.0 -1.0 -3.3
Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
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In Frontier, Kazakhstan and Argentina screen particularly well. For Kazakhstan, growth and credit are rebounding, rate cuts look likely, and the country has one of the cheaper currencies in Frontier. Argentina’s score is perhaps a touch flattering, as its currency valuation is distorted by years of poor inflation data – however, rebounding growth, likely rate cuts and the potential for positive movements on credit ratings are all positives. At the bottom end of the scale, Oman screens worst, with falling growth and lending, rating downgrades and rate hikes in the offing as the country follows the US rate cycle; Kuwait and Saudi Arabia are in a similar position.
Figure 169: MSCI Frontier countries – model scores Growth Lending REER Score – using Country Rating Rates score score score 2017 growth Kazakhstan 0.7 1.0 0.5 0.0 1.0 3.2 Argentina 1.0 -1.0 0.0 1.0 1.0 2.0 Morocco 0.9 -0.6 0.0 0.0 0.0 0.3 Kenya -0.7 -0.3 -1.0 0.0 1.0 -1.0 Nigeria 0.9 -0.6 -0.3 0.0 -1.0 -1.1 Romania -0.3 0.4 -0.3 0.0 -1.0 -1.2 Pakistan 0.4 0.2 -0.8 0.0 -1.0 -1.2 Vietnam 0.3 -0.8 -0.9 0.0 0.0 -1.5 Bangladesh -0.1 -0.6 -0.9 0.0 0.0 -1.6 Sri Lanka 0.2 -0.8 -0.5 0.0 -1.0 -2.1 Jordan 0.0 -0.8 -0.7 0.0 -1.0 -2.6 Saudi Arabia -0.8 0.0 -0.6 -1.0 -1.0 -3.4 Kuwait -1.0 0.0 -0.8 -1.0 -1.0 -3.8 Oman -0.9 -0.9 -0.4 -1.0 -1.0 -4.1
Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
Looking ahead to 2018
Without running a full set of forecasts, but using 2018 GDP growth data from the IMF, we can get a ‘sneak preview’ of what might screen well over a longer-time horizon.
In EMEA, Egypt, Turkey and Greece take the top spots, thanks to their strong growth rebounds. The UAE also moves from the bottom of the table, as it is forecast to have one of the highest growth accelerations in EM. Qatar moves to the bottom as the growth rebound peters out, while the Czech Republic screens poorly. Overall, EMEA looks a little worse using 2018 data, with the average score slipping slightly.
Figure 170: MSCI EM EMEA countries – model scores
Growth Lending REER Score – using Country Rating Rates score score score 2018 growth Egypt 0.9 -1.0 1.0 1.0 1.0 2.9 Turkey 0.8 0.8 0.0 0.0 1.0 2.6 Greece 0.6 0.7 0.0 1.0 0.0 2.3 Russia 0.0 0.9 -0.6 0.0 1.0 1.3 South Africa 0.8 0.0 0.2 -1.0 0.0 0.0 Hungary 0.1 1.0 -0.4 0.0 -1.0 -0.3 Poland 0.0 0.0 -0.2 0.0 -1.0 -1.2 UAE 1.0 -0.7 -0.6 0.0 -1.0 -1.3 Czech Republic -1.0 0.0 -0.8 1.0 -1.0 -1.8 Qatar -0.7 0.0 -0.8 -1.0 -1.0 -3.5 Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
81 Renaissance Capital 12 June 2017
The Focal Point
In Frontier, Kazakhstan remains the leader and sees its score improve, while Argentina slips back as its growth rebound fades. At the other end, the Gulf trio of Kuwait, Oman and Saudi Arabia manage to climb up the table thanks to strong growth accelerations. Also worth noting is Kenya’s swing from a negative score to a positive, while Morocco swings the other way (to a modest negative). Overall, Frontier countries look more attractive using 2018 growth than 2017 growth – perhaps 2018 will be a good year for Frontier.
Figure 171: MSCI EM EMEA countries – model scores Growth Lending REER Score – using Country Rating Rates score score score 2018 growth Kazakhstan 0.8 1.0 0.5 0.0 1.0 3.3 Argentina 0.1 -1.0 0.0 1.0 1.0 1.1 Kenya 0.6 0.0 -1.0 0.0 1.0 0.6 Morocco -0.4 -0.4 0.0 0.0 0.0 -0.8 Nigeria 0.9 -0.4 -0.3 0.0 -1.0 -0.8 Bangladesh 0.1 -0.4 -0.9 0.0 0.0 -1.2 Pakistan 0.2 0.3 -0.8 0.0 -1.0 -1.4 Vietnam 0.0 -0.8 -0.9 0.0 0.0 -1.7 Romania -1.0 0.5 -0.3 0.0 -1.0 -1.8 Saudi Arabia 0.8 0.0 -0.6 -1.0 -1.0 -1.8 Kuwait 1.0 0.0 -0.8 -1.0 -1.0 -1.8 Sri Lanka 0.3 -0.8 -0.5 0.0 -1.0 -2.0 Oman 0.9 -0.9 -0.4 -1.0 -1.0 -2.3 Jordan 0.2 -0.8 -0.7 0.0 -1.0 -2.4
Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
82 Renaissance Capital What’s been working? 12 June 2017
The Focal Point
We look at popular strategies in EM to see what’s worked best in recent years…
Apple is famous for its innovative commercials – the 1984 Macintosh Superbowl advert is repeatedly ranked as one of the best ads of all time, the ‘Think different’ slogan of the late 90s, and more recently ‘There’s an app for that’, which launched the iPhone 3G and was so popular Apple decided to trademark it. Which is a shame, as ‘there’s an ETF for that’ should probably be the slogan of the ETF industry. Want exposure to a basket of stocks in healthcare, pharma and biotech that target servicing the obese? SLIM US should suffice. For those that believe investing is gambling, BJK, a casino and gaming company ETF, is probably best avoided. PRNT US is devoted exclusively to 3D printing.
Luckily for strategists and quants everywhere, ETF proliferation means index proliferation. And index proliferation makes comparing different strategies remarkably simple. Using a set of MSCI EM-derived indices, we can look at what’s been working in EM in recent years, focusing on value stocks, growth stocks, EM excluding state-owned companies, high ESG (Environmental, Social, Governance) stocks, high dividend stocks, high quality (defined stocks with high RoE, stable earnings growth and low financial leverage), low volatility and momentum.
The best performing strategy since the end of 2014 has been ESG, which has returned 11% to 1Q17, outperforming EM by 4.5 ppts; the close behind is Ex-SOEs, returning 10.5%. Growth stocks have worked better than value stocks, outperforming EM in seven out of nine quarters and returning 8.2% vs 4.2%, while dividend payers have performed poorly, with a negative return. Low vol has also disappointed, ending flat over the period and only providing protection in the 3Q15 EM fall. Momentum strategies have also fared poorly overall, though the it showed strong returns over the last quarter.
Figure 172: EM factor index performance, 1Q15-1Q17 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Tot. return, 4Q14-1Q17 vs EM # quarters outperformed EM Quarter to date EM 2.3% 0.8% -17.8% 0.7% 5.8% 0.8% 9.2% -4.1% 11.5% 6.3% 6.8% Value 0.4% 2.0% -19.0% -1.4% 7.9% -0.2% 8.4% -1.0% 10.2% 4.2% -2.0% 3 3.4% Growth 4.0% -0.2% -16.6% 2.7% 3.7% 1.8% 9.9% -7.1% 12.8% 8.2% 1.8% 6 10.3% Ex-SOE 3.4% 0.0% -16.6% 4.3% 4.4% 0.0% 10.0% -5.4% 13.1% 10.5% 4.0% 5 9.2% ESG 3.6% -0.2% -16.2% 1.6% 7.4% 1.9% 9.2% -4.8% 10.8% 11.0% 4.5% 6 7.5% Dividend 1.4% 3.8% -21.5% -4.0% 7.1% 1.3% 7.8% 0.0% 7.3% -0.3% -6.2% 4 3.0% Quality 4.5% -2.1% -14.3% 0.0% 4.6% 1.7% 9.0% -7.8% 10.8% 4.0% -2.1% 3 7.3% Minimum Vol 3.6% -0.6% -14.3% 0.0% 5.2% 1.1% 4.8% -6.5% 8.5% 0.0% -5.9% 3 5.2% Momentum 6.4% -0.3% -20.3% -0.4% 3.9% 3.1% 5.7% -7.7% 15.4% 1.6% -4.4% 3 8.2% Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
We can carry out the same exercise for EM sectors:
Figure 173: EM sector index performance, 1Q15-1Q17 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Tot. return, 4Q14-1Q17 vs EM # quarters outperformed EM Quarter to date EM 2.3% 0.8% -17.8% 0.7% 5.8% 0.8% 9.2% -4.1% 11.5% 6.3% 6.8% Cons. Disc. 4.0% -3.1% -13.8% 2.4% 3.1% -1.3% 9.7% -9.4% 12.9% 1.6% -4.4% 5 11.8% Cons. Staples 2.0% 2.4% -11.3% -1.7% 6.3% 4.3% 1.3% -10.4% 7.6% -1.4% -7.2% 4 7.1% Energy 2.4% 8.6% -25.1% 0.1% 14.8% 1.9% 8.3% 8.1% 4.4% 19.1% 12.1% 5 -3.1% Financials -0.3% 3.1% -21.3% 0.9% 3.3% 0.5% 9.9% -0.7% 10.1% 1.8% -4.2% 4 4.2% Healthcare 6.7% -4.0% -9.4% 2.2% -0.4% 0.4% 2.3% -9.5% 5.5% -7.4% -12.8% 3 4.0% Industrials 1.3% 1.1% -16.0% -3.1% 3.1% -3.2% 4.9% -6.1% 13.6% -6.9% -12.4% 3 5.7% IT 8.4% -3.8% -15.8% 6.5% 4.8% 2.6% 16.2% -6.2% 17.0% 28.1% 20.6% 6 14.1% Materials -2.1% 1.4% -19.3% -1.7% 15.3% -0.7% 10.4% 4.3% 12.1% 16.4% 9.6% 5 -1.0% Real Estate 3.4% 1.0% -16.4% 6.8% 0.9% 1.0% 6.2% -10.5% 10.5% -0.1% -6.0% 5 13.4% Telecoms 1.5% 0.3% -15.5% -6.0% 6.7% 0.0% 2.3% -6.1% 7.7% -10.8% -16.1% 2 3.1% Utilities -3.2% -0.1% -16.8% -0.8% 8.8% 0.7% 0.9% -6.9% 10.2% -9.3% -14.7% 2 -1.3% Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
83 Renaissance Capital 12 June 2017
The Focal Point
Tech has dominated in terms of performance, with a total return of 28.1% and outperforming by 20.6 ppts, with its best quarter in 1Q17. Energy is a distant second, though it has stuttered recently, finishing 1Q17 as the worst performing sector. Telecoms have been the worst performers, with their best performance a mediocre 6.7% return in 1Q16.
By region, Asia has been the dominant performer, with a 9.3% total return. EMEA has disappointed, with a negative total return over the period. Hungary has been the best performing country, with a total return of 83.1% (+72.3% vs EM) and outperforming in seven out of nine quarters, and while its 1Q17 performance was a lacklustre 0.1%, 2Q17 to date has been good, with a 17.4% return). Russia has also performed very well, returning 56.2% (+46.0% vs EM), outperforming in six out of nine quarters – but 1Q17 was the worst in EM and 2Q17 to date has been poor. The award for consistency, however, goes to Taiwan – it has outperformed in every quarter, delivering a 19.1% total return (+12.1% vs EM), and performing in line over 2Q to date. South Korea has managed slightly better returns, but without the consistency, beating EM a little over 50% of the time. Of the larger EM countries, Turkey has been the most disappointing, returning -30.1% and underperforming in all but two quarters – however, 1Q17 was decent, and 2Q17 has been fairly strong. Greece has been hands down the worst performer, dropping by two thirds, though it has rebounded by 26% over the past two months.
Figure 174: EM country index performance, 1Q15-1Q17 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Tot. return, 4Q14-1Q17 vs EM # quarters outperformed EM Quarter to date EM 2.3% 0.8% -17.8% 0.7% 5.8% 0.8% 9.2% -4.1% 11.5% 6.3% 6.8% Asia 5.2% 0.0% -16.9% 3.6% 1.9% 0.4% 10.6% -6.0% 13.4% 9.3% 2.8% 5 9.0% EMEA 2.0% 2.0% -16.0% -8.2% 13.0% -1.1% 5.9% 1.9% 2.8% -0.4% -6.3% 4 3.7% LatAm -9.5% 3.6% -24.3% -2.6% 19.2% 5.4% 5.4% -0.8% 12.1% 1.9% -4.1% 5 -1.8% China 8.1% 6.2% -22.7% 4.0% -4.8% 0.3% 14.0% -7.1% 12.9% 5.5% -0.8% 5 12.0% India 6.0% -3.9% -6.7% -1.2% -2.3% 3.6% 5.9% -8.1% 17.4% 8.7% 2.3% 4 4.8% Indonesia 2.7% -14.0% -24.0% 20.1% 13.2% 3.6% 9.5% -8.4% 7.6% 2.0% -4.0% 5 6.1% South Korea 3.8% -3.9% -11.7% 5.6% 5.5% -1.4% 11.2% -5.3% 16.8% 19.1% 12.1% 5 9.7% Malaysia -1.5% -7.1% -18.7% 7.4% 14.4% -5.7% -2.3% -8.6% 8.3% -16.7% -21.6% 2 7.3% Philippines 10.2% -4.9% -10.2% -0.2% 7.1% 5.5% -4.6% -12.9% 5.9% -6.5% -12.0% 4 11.0% Taiwan 4.1% 1.0% -16.5% 1.3% 7.9% 1.2% 12.343% -2.8% 12.3% 18.9% 11.9% 9 6.8% Thailand 2.3% -3.3% -17.7% -6.2% 17.5% 2.7% 7.4% -2.0% 8.9% 5.8% -0.4% 5 1.4% Brazil -14.6% 7.0% -33.6% -3.2% 28.6% 13.9% 11.4% 2.2% 10.4% 8.3% 1.9% 5 -6.2% Chile 0.1% -3.0% -13.6% -1.0% 13.2% 2.5% -1.7% 2.4% 16.1% 12.8% 6.2% 5 0.7% Colombia -19.2% 3.4% -23.2% -9.5% 22.4% 2.9% 2.7% -2.3% 5.7% -22.4% -27.0% 4 5.6% Mexico -2.0% 0.4% -12.0% -1.2% 8.4% -6.9% -2.2% -7.9% 16.0% -9.7% -15.0% 3 4.6% Peru -6.0% 0.8% -21.5% -8.1% 27.0% 18.2% 1.1% 2.5% 5.5% 12.2% 5.6% 3 6.3% Czech -3.7% 3.9% -6.3% -11.0% 4.5% -3.7% -0.2% -3.3% 5.7% -14.3% -19.4% 3 12.0% Egypt 1.5% -6.1% -12.9% -7.8% -5.9% 0.9% 21.4% -23.2% 0.9% -31.6% -35.6% 3 8.5% Greece -29.4% 5.5% -35.7% -19.1% -12.5% -13.2% 1.4% 15.4% -3.5% -66.8% -68.8% 2 25.7% Hungary 12.8% 11.4% -3.4% 12.9% 15.7% -4.8% 10.9% 9.2% 0.1% 83.1% 72.3% 7 17.4% Poland -4.0% -0.4% -10.5% -11.9% 12.2% -16.8% 3.0% 3.4% 18.0% -11.6% -16.8% 4 13.8% Russia 18.6% 7.7% -14.4% -4.0% 15.8% 4.2% 8.9% 18.7% -4.6% 56.2% 47.0% 6 -8.0% South Africa 3.0% -0.5% -18.6% -10.2% 14.1% 1.3% 6.9% -4.5% 5.0% -7.3% -12.7% 3 6.1% Turkey -15.9% 1.3% -19.6% -0.1% 21.5% -7.5% -5.3% -13.9% 11.4% -30.1% -34.2% 2 15.9% UAE -5.3% 10.7% -10.4% -12.6% 8.0% 0.1% 6.1% -1.5% 2.3% -5.2% -10.7% 4 2.7% Qatar -3.3% -0.8% -6.6% -10.2% 3.7% -4.9% 7.0% 0.6% 1.9% -12.9% -18.0% 2 -8.5% Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
84 Renaissance Capital 12 June 2017
The Focal Point
Betas and correlations
Measuring sensitivities using betas, we find that Brazil, South Africa and Mexico have the highest betas to MSCI EM on a 52-week basis; over the last three years, Russia has also been particularly sensitive to EM. More defensive countries include Hungary, Qatar and UAE. EM as a whole is roughly 1 beta to DM, though this has fallen slightly.
In Frontier, Nigeria has the highest beta to Frontier, even adjusting for extremes. Argentina and Kazakhstan are also particularly sensitive. Saudi Arabia is largely insensitive to Frontier (and has decoupled over the last five years), along with Jordan, Oman and Lebanon. Frontier is holding steady at 0.5 beta to MSCI EM.
Figure 175: MSCI EM and Frontier Betas to parent index
52-week Beta 5yr Beta 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2
0.0
UAE
Peru
India
Chile
Brazil
Qatar
Egypt
China
Oman
Czech Kenya
Serbia
Kuwait
Turkey Russia
Jordan
Poland
Mexico Nigeria
Taiwan Tunisia Croatia
Greece
Estonia
Bahrain
Vietnam
Hungary
WAEMU
Pakistan Slovenia Morocco
Thailand
Lebanon
Malaysia
Romania
Mauritius
Lithuania
Colombia
Sri Lanka Sri
Argentina
Indonesia
Philippines
EM (to DM) (to EM
Kazakhstan
Bangladesh
South Africa South
South Korea South Saudi Arabia Saudi
Frontier (to EM) (to Frontier Note: Beta to MSCI EM for EM countries and to MSCI Frontier for FM countries. Adjusted Betas winsorised to 2 standard deviations used to filter outliers Source: MSCI, Bloomberg, Renaissance Capital
We can also look at 52-week correlations to selected macro drivers:
Figure 176: EM Correlations EM DM EMBI Spread Brent crude Commodities (ex-Oil) DXY EM 100% 54% -59% 26% 35% -20% China 87% 43% -49% 28% 30% -17% India 76% 44% -39% 9% 18% -26% Indonesia 60% 18% -30% 27% 27% -27% South Korea 81% 54% -47% 15% 22% -44% Malaysia 83% 36% -59% 26% 31% -35% Philippines 64% 36% -36% 20% 21% -11% Taiwan 89% 51% -52% 19% 33% -16% Thailand 55% 49% -23% 14% 14% -18% Brazil 66% 30% -40% 4% 15% 18% Chile 67% 23% -30% 16% 25% -4% Colombia 53% 4% -50% 61% 49% -3% Mexico 70% 29% -43% 32% 30% -12% Peru 40% 44% -22% 0% 12% -20% Czech 43% 20% -18% 11% 7% -34% Egypt 24% 18% -14% 13% 23% 22% Greece 28% 53% -16% 8% 3% -4% Hungary 22% 19% -14% 0% -1% -29% Poland 56% 46% -50% 3% 6% -23% Russia 57% 40% -53% 42% 49% 9% South Africa 76% 36% -29% 10% 18% -38% Turkey 44% 33% -36% 5% 16% -30% UAE 34% 17% -21% 2% 10% 9% Qatar 30% 20% -27% 35% 34% 13%
Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
85 Renaissance Capital 12 June 2017
The Focal Point
South Korea, Taiwan and Greece are the most sensitive to DMs, while Malaysia, Russia and Taiwan suffer the most when EMBI spreads rise while Egypt suffers least. Colombia and Russia are the most tightly linked to oil, and recently Colombia has been a closer play on oil than Russia. The same two countries are also the most linked to commodities (ex- oil). South Korea is the best play on a weakening dollar, followed by South Africa, while Egypt and Brazil have been shielded from this over the last year.
Figure 177: Frontier Correlations Frontier EM EMBI Spread Brent crude Commodities (ex-Oil) DXY Frontier 100% 35% -13% 6% 22% -35% Argentina 58% 50% -24% 6% 23% -19% Bahrain 33% 25% 2% -5% 2% -8% Bangladesh 13% 9% -9% 20% 21% 5% Croatia 13% 13% -1% -8% -10% -51% Estonia 9% 13% -4% -6% -8% -45% Jordan -8% 9% 9% -14% -10% 20% Kazakhstan 41% 49% -53% 18% 24% -3% Kenya 18% 1% 22% -1% 5% -41% Kuwait 46% 6% 3% 6% 17% 0% Lebanon 6% 13% -12% -1% -4% 19% Lithuania 17% 2% 4% -8% -19% -75% Mauritius 30% 34% -25% 22% 28% -16% Morocco 22% 4% -24% 2% 1% -14% Nigeria 72% 1% 9% 3% 8% -17% Oman 9% 12% -23% 30% 28% 13% Pakistan 49% 12% -19% -9% -10% 0% Romania 44% 26% -4% 19% 15% -57% Saudi Arabia -6% -4% -1% 15% 14% 16% Slovenia 32% 20% -8% -22% -9% -56% Sri Lanka 17% 10% -13% 22% 12% -18% Serbia 23% 40% -15% 21% 30% -39% Tunisia 33% 14% 0% 7% 9% -22% WAEMU 6% -7% 18% -5% -1% -52% Vietnam 36% 37% -29% 8% 21% -25%
Source: IMF, Bruegel, MSCI, Bloomberg, Renaissance Capital
In Frontier, Argentina has the highest correlation with EM, followed by Kazakhstan, while WAEMU has the lowest. Kazakhstan suffers the most from high EMBI spreads, while Kenya is positively correlated to higher EMBI spreads. Oman is the most oil-linked market, while Serbia is the most correlated to commodities. Euro countries such as Lithuania and Slovenia work best when the dollar is falling, while the Gulf offers the best defence against dollar strength.
86 Renaissance Capital EM fund flows: Allocations 12 June 2017
The Focal Point
The following charts show country allocations of non-ETF GEM equity funds benchmarked to MSCI EM vs index weights, with shaded areas highlighting over/underweights, based on a sample of c. 40% of MSCI EM-benchmarked active AuM.
Figure 178: Non-ETF allocation to China vs benchmark Figure 179: Non-ETF allocation to South Korea vs benchmark Overweight Underweight Overweight Underweight China Index weight China fund weight South Korea Index weight South Korea fund weight 30% 30%
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 180: Non-ETF allocation to Taiwan vs benchmark Figure 181: Non-ETF allocation to India vs benchmark Overweight Underweight Overweight Underweight Taiwan Index weight Taiwan fund weight India Index weight India fund weight 20% 18% 18% 16% 16% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2%
0% 0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 182: Non-ETF allocation to Brazil vs benchmark Figure 183: Non-ETF allocation to South Africa vs benchmark Overweight Underweight Overweight Underweight Brazil Index weight Brazil fund weight South Africa Index weight South Africa fund weight 20% 18% 18% 16% 16% 14% 14% 12% 12% 10% 10% 8% 8% 6% 6% 4% 4% 2% 2%
0% 0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
87 Renaissance Capital EM fund flows: Allocations 12 June 2017
The Focal Point
Figure 184: Non-ETF allocation to Russia vs benchmark Figure 185: Non-ETF allocation to Mexico vs benchmark Overweight Underweight Overweight Underweight Russia Index weight Russia fund weight Mexico Index weight Mexico fund weight 14% 18%
12% 16% 14% 10% 12% 8% 10% 6% 8% 6% 4% 4% 2% 2%
0% 0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 186: Non-ETF allocation to Indonesia vs benchmark Figure 187: Non-ETF allocation to Malaysia vs benchmark Overweight Underweight Overweight Underweight Indonesia Index weight Indonesia fund weight Malaysia Index weight Malaysia fund weight 7% 20% 18% 6% 16% 5% 14% 4% 12% 10% 3% 8% 2% 6% 4% 1% 2%
0% 0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 188: Non-ETF allocation to Thailand vs benchmark Figure 189: Non-ETF allocation to the Poland vs benchmark Overweight Underweight Overweight Underweight Thailand Index weight Thailand fund weight Poland Index weight Poland fund weight 12% 3%
10% 3%
8% 2%
6% 2%
4% 1%
2% 1%
0% 0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
88 Renaissance Capital EM fund flows: Allocations 12 June 2017
The Focal Point
Figure 190: Non-ETF allocation to Chile vs benchmark Figure 191: Non-ETF allocation to the Philippines vs benchmark Overweight Underweight Overweight Underweight Chile Index weight Chile fund weight Philippines Index weight Philippines fund weight 6.0% 7.0%
5.0% 6.0% 5.0% 4.0% 4.0% 3.0% 3.0% 2.0% 2.0%
1.0% 1.0%
0.0% 0.0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 192: Non-ETF allocation to Turkey vs benchmark Figure 193: Non-ETF allocation to Qatar vs benchmark (from Jan 2008) Overweight Underweight Overweight Underweight Turkey Index weight Turkey fund weight Qatar Index weight Qatar fund weight 9.0% 1.2% 8.0% 1.0% 7.0% 6.0% 0.8% 5.0% 0.6% 4.0% 3.0% 0.4% 2.0% 0.2% 1.0%
0.0% 0.0%
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 194: Non-ETF allocation to UAE vs benchmark (from Jan 2008) Figure 195: Non-ETF allocation to Colombia vs benchmark Overweight Underweight Overweight Underweight UAE Index weight UAE fund weight Colombia Index weight Colombia fund weight 1.2% 1.4%
1.0% 1.2% 1.0% 0.8% 0.8% 0.6% 0.6% 0.4% 0.4%
0.2% 0.2%
0.0% 0.0%
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
89 Renaissance Capital EM fund flows: Allocations 12 June 2017
The Focal Point
Figure 196: Non-ETF allocation to Peru vs benchmark Figure 197: Non-ETF allocation to Greece vs benchmark Overweight Underweight Overweight Underweight Peru Index weight Peru fund weight Greece Index weight Greece fund weight 1.6% 10.0% 1.4% 9.0% 8.0% 1.2% 7.0% 1.0% 6.0% 0.8% 5.0% 0.6% 4.0% 3.0% 0.4% 2.0% 0.2% 1.0%
0.0% 0.0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 198: Non-ETF allocation to Hungary vs benchmark Figure 199: Non-ETF allocation to Czech Republic vs benchmark Overweight Underweight Overweight Underweight Hungary Index weight Hungary fund weight Czech Index weight Czech fund weight 3.0% 1.6% 1.4% 2.5% 1.2% 2.0% 1.0% 1.5% 0.8% 0.6% 1.0% 0.4% 0.5% 0.2%
0.0% 0.0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 200: Non-ETF allocation to Egypt vs benchmark Figure 201: Non-ETF allocation to cash Overweight Underweight Cash Average Cash Egypt Index weight Egypt fund weight 14% 2.5% 12% 2.0% 10%
1.5% 8%
6% 1.0% 4% 0.5% 2%
0.0% 0%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: MSCI, EPFR.com Source: MSCI, EPFR.com
90 Renaissance Capital EM fund flows: Net overweight 12 June 2017
The Focal Point
The following charts show the percentage net over/underweight allocation to each MSCI country, calculated by (# funds overweight - # funds underweight)/(# total number of funds in sample), which can illustrate the breadth of positioning.
Figure 202: % net over/underweight allocation to China Figure 203: % net over/underweight allocation to South Korea
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 204: % net over/underweight allocation to Taiwan Figure 205: % net over/underweight allocation to India
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 206: % net over/underweight allocation to Brazil Figure 207: % net over/underweight allocation to South Africa
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
91 Renaissance Capital EM fund flows: Net overweight 12 June 2017
The Focal Point
Figure 208: % net over/underweight allocation to Russia Figure 209: % net over/underweight allocation to Mexico
100% 100% Mexico 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 210: % net over/underweight allocation to Indonesia Figure 211: % net over/underweight allocation to Malaysia
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 212: % net over/underweight allocation to Thailand Figure 213: % net over/underweight allocation to Poland
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
92 Renaissance Capital EM fund flows: Net overweight 12 June 2017
The Focal Point
Figure 214: % net over/underweight allocation to Chile Figure 215: % net over/underweight allocation to the Philippines
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 216: % net over/underweight allocation to Turkey Figure 217: % net over/underweight allocation to Qatar (from Jan 2008)
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 218: % net over/underweight allocation to UAE (from Jan 2008) Figure 219: % net over/underweight allocation to Colombia
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-08 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
93 Renaissance Capital EM fund flows: Net overweight 12 June 2017
The Focal Point
Figure 220: % net over/underweight allocation to Peru Figure 221: % net over/underweight allocation to Greece
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 222: % net over/underweight allocation to Hungary Figure 223: % net over/underweight allocation to Czech Republic
100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% -40% -40% -60% -60% -80% -80%
-100% -100%
Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com Source: MSCI, EPFR.com
Figure 224: % net over/underweight allocation Egypt
100% 80% 60% 40% 20% 0% -20% -40% -60% -80%
-100%
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-96 Source: MSCI, EPFR.com
94 Renaissance Capital Disclosures appendix 12 June 2017
The Focal Point
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Important issuer disclosures outline currently known conflicts of interest that may unknowingly bias or affect the objectivity of the analyst(s) with respect to an issuer that is the subject matter of this report. Disclosure(s) apply to Renaissance Securities (Cyprus) Limited or any of its direct or indirect subsidiaries or affiliates (which are individually or collectively referred to as “Renaissance Capital”) with respect to any issuer or the issuer’s securities. 16 January 2016 marked Implementation Day of the Joint Comprehensive Plan of Action (JCPOA) which removed many of the international EU, and some U.S. and other sanctions against Iran. However, certain EU, U.S. and other restrictions continue to apply to Iran, including prohibitions against conducting business with or engaging in investments where Specially Designated Nationals (SDNs) or other Designated Persons exist. Under UK law, criminal penalties for violating restrictions on investment in, or certain financial transactions with Iran where Designated Persons exist can carry criminal penalties including up to 2 years in prison and/or substantial fines. Whilst we utilize best efforts to identify Designated Persons in the ownership structure of the Iranian securities in our research coverage, you are encouraged to conduct your own independent due diligence in this area.
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95
Renaissance Capital research team
Head of Research – Eurasia Daniel Salter +44 (207) 005-7824 [email protected] Head of Research – Africa Johann Pretorius +27 (11) 750-1450 [email protected] Head of Research – Sub-Saharan Africa Yvonne Mhango +27 (11) 750-1488 [email protected]
Name Telephone number Coverage Name Telephone number Coverage Macro Oil and gas Charles Robertson +44 (207) 005-7835 Global Alexander Burgansky +44 (207) 005-7982 Russia/CIS, Africa Yvonne Mhango +27 (11) 750-1488 Sub-Saharan Africa Temilade Aduroja +234 (1) 448-5300 x5363 Sub-Saharan Africa Oleg Kouzmin +7 (495) 258-7770 x4506 Russia/CIS Evgeny Stroinov +7 (495) 258-7770 x4046 Russia/CIS
Equity strategy Metals and mining Daniel Salter +44 (207) 005-7824 Global Johann Pretorius +27 (11) 750-1450 South Africa Charles Robertson +44 (207) 005-7835 Global Steven Friedman +27 (11) 750-1481 South Africa Vikram Lopez +44 (207) 005-7974 Global Kabelo Moshesha +27 (11) 750-1472 South Africa Siphelele Mhlongo +27 (11) 750-1420 South Africa Financials Vladimir Sklyar +7 (495) 641-4188 Russia/CIS Armen Gasparyan +7 (495) 783-5673 Russia/CIS, CEE Anastasia Tikhonova +7 (495) 604-4493 Russia/CIS/SSA/Pakistan Ilan Stermer +27 (11) 750-1482 South Africa Phago Rakale +27 (11) 750-1498 South Africa Telecoms/Transportation Francois Du Toit +27 (11) 750-1162 South Africa Alexander Kazbegi +41 (78) 883-4527 Global Olamipo Ogunsanya +234 (1) 448-5300 x5368 Sub-Saharan Africa Artem Yamschikov +7 (495) 258-7770 x7511 Russia/CIS Balram Ramesh +971 (4) 409-2054 MENA Amine Wafy +971 (4) 409-2052 MENA
Consumer/Retail/Agriculture Utilities/Electric Equipment David Ferguson +7 (495) 641-4189 Russia/CIS, Africa Vladimir Sklyar +7 (495) 641-4188 Russia/CIS/SSA/Pakistan Kirill Panarin +7 (495) 258-7770 x4009 Russia/CIS, Africa Anastasia Tikhonova +7 (495) 604-4493 Russia/CIS/SSA/Pakistan Vladislav Petrukhin +7 (495) 258-7770 x7549 Russia/CIS, Africa Zaheer Joosub +27 (11) 750-1427 South Africa Fertilisers Adedayo Ayeni +234 (1) 448-5390 Sub-Saharan Africa Vladimir Sklyar +7 (495) 641-4188 Russia/CIS/MENA/Pakistan Olaloye Oyawoye +234 (1) 448-5300 x5377 Sub-Saharan Africa/CEE Anastasia Tikhonova +7 (495) 604-4493 Russia/CIS/SSA/Pakistan Robyn Collins +27 (11) 750-1480 South Africa Mohamed Zein +971 (4) 409-2032 MENA Media/Technology/ Amine Wafy +971 (4) 409-2052 MENA David Ferguson +7 (495) 641-4189 Russia/CIS, Africa Kirill Panarin +7 (495) 258-7770 x4009 Russia/CIS, Africa Diversified/Industrials Vladislav Petrukhin +7 (495) 258-7770 x7549 Russia/CIS, Africa Brent Madel +27 (11) 750-1160 South Africa Metin Esendal +44 (207) 005-7925 Turkey Renaissance Capital research is available via the following platforms: Renaissance research portal: research.rencap.com Thomson Reuters: thomsonreuters.com/financial Bloomberg: RENA
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