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For Institutional Use Only1 Emerging Markets: What’s an Investor to Do? Outlook to 2010 and beyond Sara Zervos, Oppenheimer Funds.

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Presentation on theme: "For Institutional Use Only1 Emerging Markets: What’s an Investor to Do? Outlook to 2010 and beyond Sara Zervos, Oppenheimer Funds."— Presentation transcript:

1 For Institutional Use Only1 Emerging Markets: What’s an Investor to Do? Outlook to 2010 and beyond Sara Zervos, Oppenheimer Funds

2 For Institutional Use Only2 It’s been a Wild Ride this Past Year

3 For Institutional Use Only3 The Ride Up, 2008 Then:  Inflation was primary concern  Food and commodity induced inflation was a war central banks couldn’t fight easily  Slowing growth in developed world, EM steaming along  US already hurting from housing market  Commodity exporters booming, importers suffering  Current accounts severely imbalanced  US (-4.9%), Turkey (-5.7%), China (9.4%), Russia (6.1%)

4 For Institutional Use Only4 The Ride Down, Q4 2008 - 2009 Now:  Inflation? What inflation?  Output gaps in abundance  Commodity prices “higher” but stable  Sub-trend Growth Globally  Developed markets expected -3.3% 2009  EM expected 0.5%, without China, -1.4% (JPM estimates)  Current accounts converging toward balance  Trade collapsed

5 For Institutional Use Only5 Inflation on Downward Trend Arthur Steinmetz Team Leader/Portfolio Manager (% annual change)

6 For Institutional Use Only6 GDP Growth Suffering

7 For Institutional Use Only7 Current Accounts on the Move

8 For Institutional Use Only8 A round-trip ride in the Markets, as well Investment themes pre-crisis 2008  Credit: De-coupling, credit at all time tights  Interest Rates: Pay, pay, pay  FX: bullish commodity exporters, bearish importers Investment themes Q4 2008 – Q1 2009  De-lever: Sell everything, if you must, and if you can  Buy dollars, receive rates  Focus on policies in Washington, D.C. and China Investment theme mid 2009: markets back to normal?  Buy credit, buy equities, buy EMFX

9 For Institutional Use Only9 Interest Rates Change Course

10 For Institutional Use Only10 FX: South Korea and Colombia

11 For Institutional Use Only11 Where do we stand? Growth  Inventory replenishing  Massive fiscal stimulus driving Q2 growth rebound  Chinese demand drives growth abroad  Temporary (?) boost in consumption due to targeted programs (cash for clunkers, tax incentives, etc)  Consumer confidence growing, but are they spending?  What happens when the stimulus runs dry?  Trade flows still low  FDI resilient into China, Brazil

12 For Institutional Use Only12 Growth Outlook for 2009, 2010: Still Below Potential

13 For Institutional Use Only13 Inflation not an immediate worry  Falling, or stable at low levels, in MOST countries  Exception – India and China, Israel?  India visible  Israel: still within target but signs are showing (rate hike already)  China: deflation slowing

14 For Institutional Use Only14 Commodities  OPEC forecasts world oil demand to turn positive in 2010  World real GDP growth and oil consumption are highly correlated  Fundamentals drivers call for positive outlook: OPEC compliance high, non-OPEC supply growth minimal, lower inventories, higher utilization rates ahead  Prices have stabilized, yet forecasts for next year are varied, due to micro and technical factors as well

15 For Institutional Use Only15 So, the recession is over, what do we do now? Uncertainty is as high as ever  Are we facing a “double dip” growth scenario?  Does the U.S. (and Europe..and China..) have an exit strategy from quantitative easing and fiscal stimulus?  Will the consumer start spending?  Will the swine flu be a factor once the northern hemisphere enters winter?  Will the US Dollar suffer?

16 For Institutional Use Only16 How to Frame Investment Decisions in and Uncertain World  Create macroeconomic scenarios  Assign probabilities  Focus on country specific information in each scenario  Forecast returns and make asset allocation decisions

17 For Institutional Use Only17 Ex-ante 2010 investment outlook Start with the global macroeconomic outlook  “Too Hot”  Above potential GDP growth  Falling unemployment  Climbing commodity prices, rising interest rates  “Too Cold”  Back into recession, rising unemployment  “Just Right”  Slow resumption to trend growth  Unemployment rates stabilize at high levels  Monetary policy remains loose

18 For Institutional Use Only18 Oppenheimer International Fixed Income Team Forecasts PROBABILIT Y OF SCENARIO FED FUNDS RATE 10yr U.S. TREASU RY YIELD WTI OIL PRIC E ($/bbl ) BAA- RATED BOND SPREAD S S&P 500 EUR/US D USD/JP Y “TOO HOT” – Global economy continues to accelerate into H1 2010 to above-trend growth rates, causing unemployment rates to decline. 40%0.21%4.24%$81248bp11761.40105 “TOO COLD” – Global economic recovery stalls out in H1 2010 and growth rates dip back down again. Unemployment rates rise further. 20%0.18%3.18%$46349bp8641.3490 “JUST RIGHT” – Global growth continues at a trend-like pace (2- 2.5%) in H1 2010 putting no downward pressure on unemployment rates. 40%0.18%3.75%$66291bp10431.4398

19 For Institutional Use Only19 Emerging Market Credit Outlook

20 For Institutional Use Only20 Spreads unlikely to tighten much more  But in a zero-interest rate world, yields are still appealing  Demand for new issues to remain high  Money still to be invested, inflows  Bank credit not abundant, only highly rated companies issuing debt  Ability to pay still high (in “too hot” or “just right”)  High beta countries and quasi-sovereign credits likely to tighten

21 For Institutional Use Only21 Credit: clip the coupons  Overweight Argentina – highest yielding and potential upside as the country moves to access international capital markets  Overweight Venezuela – but get ready to trim exposure as country fundamentals are still deteriorating  Overweight quasi-sovereigns  Russia state owned or supported entities (VTB, Gazprom, Russian Agricultural Bank, for example)  Latin american infrastructure/commodities (EPM, TGI, Petrobras, Pemex, Panama Canal Railways)  Asian development banks, electricity related companies, etc.

22 For Institutional Use Only22 Interest Rates Curves are steep, and already pricing in hikes  Carry is king, buy long end bonds where rates are relatively high and no hikes on the horizon (Brazil, Mexico, Turkey, Hungary, Indonesia)  Get ready to pay rates in the front end where the easing cycle is clearly over (Israel, Czech, Poland, Korea, China, India)  Clip the coupons, until inflation rears its ugly head

23 For Institutional Use Only23 Foreign Exchange  As growth slowly recovers, and zero rates prevail in G10, buy higher yielding EMFX  Brazil, Turkey, Hungary, South Africa, Indonesia, Mexico  Volatility likely through 2009 as data wavers between recovery and slowdown (differing views of trend GDP growth)  The dollar may suffer as fiscal deterioration and Fed bal sheet expansion takes hold, absent a traditional recovery  G10 fx already overvalued, much of EM still undervalued

24 For Institutional Use Only24 EMFX undervalued relative to Developed FX

25 For Institutional Use Only25 A Closer look at the BRICs: Brazil Brazil was growing fast when credit crisis hit  Fast, decisive action by central bank offset liquidity issues Is the market right on interest rate bounce?  Election year coming, fiscal deterioration is apparent, but CB and market forecasts take account of this Likely to be one of fastest countries to return to trend growth  Attracting capital flows of all kinds Our favorite local currency investment for 2009-2010

26 For Institutional Use Only26 BRICs, Continued: Russia  Economic fundamentals still deteriorating  Huge unwind of corporate leverage dragging on resources and economy  Growth -8.5-9% for 2009, rebound to 4.5% possible in 2010 with oil price recovery  Rising NPLs a trouble for non-state supported financial institutions  Risk of capital flight on RUB  We like the state-supported corporate debt – high yield, high state support, low risk of default

27 For Institutional Use Only27 BRICS, continued: India  Massive fiscal and economic stimulus has kept economy growing 6% 2009, expecting 7.5% 2010  Inflation starting to move higher, interest rate increases expected early next year  Inflows to equity markets key driver for currency  Pay rates, short usdinr

28 For Institutional Use Only28 BRICS, continued: China  “THE” engine of world growth – investment led V-shaped recovery  Growth sustainable through 2010  Even without export recovery, economists expect 9-10% growth in 2010  Policymakers concerned about bubbles, fine tuning lending and interest rates  Domestic consumption picking up, though exports still lagging  Longer term reforms beginning (social safety net)  Bond market not open, fx stable, equities key moving asset

29 For Institutional Use Only29 2010: Off the roller coaster, on to the carousel

30 For Institutional Use Only30 Up and down

31 For Institutional Use Only31 Round and round

32 For Institutional Use Only32 It will hopefully be more fun than last year! El Fin!


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