The Emerging Markets
The Evolving View From a Developed Perspective
John Parsons Partner & Manager, Institutional Marketing
CFA Society Pittsburgh
May 22, 2014
MSCI Classification of Global Equity Markets
Source: Wilshire Atlas
Emerging Markets Developed Intl.
Frontier Markets
United States
View from 10,000 Feet
Source: World Bank/IMF, US Census, MSCI Barra data at December 31, 2008.
Population GDP Equity Market Cap
Frontier & Beyond Emerging Markets Developed International Markets US
58%
9%
5%
23%
45%
25%
9%
46%
45%
28%
7%
0.4% Frontier
Emerging Markets Performance 2000 – 2013
Source: MSCI Barra, S&P (Data as of December 31, 2013)
Index Performance (cumulative)
0 100 200 300 400 500 600
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
MSCI EM INDEX MSCI EAFE INDEX S&P 500 INDEX
EM Sovereign Bond Spread
Source: Bloomberg, data as of December 31, 2010
Please read the disclosures on the last page, which are an integral part of this presentation.
100 110 120 130 140 150 160
MSCI EM INDEX MSCI EAFE INDEX S&P 500 INDEX
Equity Markets Performance May 2012 – March 2014
Source: MSCI Barra, S&P (Data as of March 31, 2014)
Index Performance (cumulative)
Fed Taper
Source: Barclays Asset Allocation Research, “Global Asset Allocator: Who is vulnerable to Fed tapering?,” May 28, 2013.
China Taper
15 17 19 21 23 25 27 29 31 33 35
YOY % Change
Chinese Fixed Asset Investment Year-Over-Year Growth
Chinese Fixed Asset Investment Growth Source: Bloomberg, data as of July 31, 2014
Emerging Markets Valuation Discount at a 10-Year High vs DM
Source: BCA Research, Monthly Forecast and Analysis of the U.S. Economy and Financial Markets, March 2014.
0
-1
-2
-3
-4
-5
-6
-7
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0
-1
-2
-3
-4
-5
-6
-7 VALUATI ON GAP BETWEEN EMERGI NG MARKETS
AND DEVELOPED MARKETS*
St Dev
St Dev
* NORMALIZED AVERAGE OF PRICE-TO-SALES, PRI CE-TO-CASH FLOW, PRICE-TO-BOOK, PRICE-TO-TRAILING EARNINGS, PRI CE-TO-FORWARD EARNI NGS;
AND DI VI DEND YI ELD. THE ZERO LI NE CORRESPONDS TO THE SAME VALUATION SCORE I N DEVELOPED MARKETS AS IN EMERGI NG MARKETS.
SOURCE: IBES, BLOOMBERG AND MSCI I NC. (SEE COPYRI GHT DECLARATION).
© BCA Research 2014
Emerging vs. Frontier Markets
Source: MSCI Barra, Wilshire Atlas (Data as of June 30, 2013)
Please read the disclosures on the last page, which are an integral part of this presentation.
0 200 400 600 800 1000 1200 1400 1600
MSCI EM MSCI FM
Indices Since Inception (relative to 100)
Dec 1987 May 2002
Dec 1992 May 2007
Dec 1997 May 2012
Dec 2002 Dec 2007 Dec 2012
Emerging Markets Weight: 1988 vs. 2014
Frontier 0.4%
Emerging 9.5%
Developed 90.1%
Market Capitalization, 2014
Source: MSCI Barra, data as of March 31, 2014; “Emerging Markets: A 20-year Perspective.” 2008, MSCI Barra; MSCI World Index.
Developed 99%
Emerging 1%
Market Capitalization, 1988
Frontier Versus Emerging Markets
Population Distribution
Source: BlackRock, Crossing the Frontier: Accessing New Sources of Growth and Diversification with Frontier Markets, p. 8, 2/21/14.
Population Distribution
USA
Source: U.S. Census Bureau, International Data Base (IDB). Data as of December 2010
-10 -5 0 5 10
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79
% Total Gender
Age Group
Percent Female Percent Male
Germany Japan
-10 -5 0 5 10
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79
% Total Gender
Percent Female Percent Male
-10 -5 0 5 10
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79
% Total Gender
Percent Female Percent Male
Population Distribution
China India Brazil
-15 -10 -5 0 5 10 15
0-4 10-14 20-24 30-34 40-44 50-54 60-64 70-74
% Total Gender
Age Group
Percent Female Percent Male
-15 -10 -5 0 5 10 15
0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79
% Total Gender
Percent Female Percent Male
-15 -5 5 15
0-4 10-14 20-24 30-34 40-44 50-54 60-64 70-74
% Total Gender
Percent Female Percent Male
Source: U.S. Census Bureau, International Data Base (IDB). Data as of December 2010
GDP Growth Rates
Expected Annual GDP Growth 2011 - 2050 Last 10 Years of Growth
1.04 1.06 1.08 1.1 1.12 1.14 1.16
Panama Bhutan Mongolia Ethiopia Turkmenistan Angola China Qatar Azerbaijan Macao
Top Ten Countries by GDP Growth 2003-2012
Frontier Countries Emerging Countries
Source: World Bank, Citigroup: https://ir.citi.com/SBETdAQAynlg1TAJ39qgHy0vrBj%2BYF%2FYjPXm0ih7QZcKnimhExiD5A%3D%3D
EM Market Capitalization
Source: MSCI Barra, data as of June 30, 2013.
0.0% 5.0% 10.0% 15.0% 20.0%
Morocco Hungary Czech Republic Egypt Peru Philippines Colombia Poland Chile Turkey Thailand Indonesia Malaysia Mexico Russia India South Africa Taiwan Brazil South Korea China
Emerging Markets Countries by Market Cap
June 30, 2013
Economic Management: Debt
General Government Gross Debt as a % of GDP (2011)
Emerging Markets Europe
“Good” “Bad”
Other Developed
Brazil 35 Germany 60 Greece 117 Japan 223
China 19 Spain 70 Ireland 102 USA 99
India 72 UK 82 Portugal 87
Indonesia 26
Source: International Monetary Fund, World Economic Outlook Database, October 2010 Please read the disclosures on the last page, which are an integral part of this presentation.
Stock Market Penetration
0%
20%
40%
60%
80%
100%
120%
140%
160%
Source: Wilshire Atlas, MSCI Barra, CIA Fact Book. Data as of December 31, 2012.
Market Capitalization to GDP by Country
Risks - Corruption
Source: http://www.nigerianmuse.com; Corruption Perceptions Index 2011 Released
“Any time you go into Emerging Markets, you are trading
the rule of law for growth.” Sam Zell
No Clear Correlation Between Long-Term GDP Growth and Equity Returns
Source: BCA Research, The Bank Credit Analyst, November 2012
Quality & Growth Characteristics EM vs. Developed Companies
11.6
5.7
16.2
29.2
2.7
14.0
8.8
11.0
4.5 10.5
5.3
13.8
47.1
3.6 4.2
7.4 7.4
4.9
0 10 20 30 40 50
Profit Margin Return on Assets
Return on Equity
Debt/Equity Std. Dev. of ROE
Trailing 5-Yr.
Sales Growth
Trailing 5-Yr.
Earnings Growth
Trailing 5-Yr.
Cash Flow Growth
Trailing 5-Yr.
Dividend Growth
Percent
MSCI EM Index MSCI World Index
Source: Wilshire Atlas, five-year historical data as of March 31, 2014.
Revenue Perspective of the MSCI ACW Index
0 10 20 30 40 50
United States Canada Asia/Pacific Emerging Markets Developed Europe
Domicile (%) Revenue (%)
MSCI ACW Index as of December 31, 2012
Source: American Funds, Investment Insights: The New Geography of Investing; April 2013, p. 2.
Example: Global Equity Strategy Model Portfolio
25 12
23
40
10 11
22
57
13 13
23
52
0 10 20 30 40 50 60
Emerging Markets Asia Pacific Europe & Middle East North America
Index Weight by Domicle (%) Portfolio Weight by Domicile (%) Portfolio Weight by Revenue (%)
Portfolio Weights versus Estimated Sources of Revenues by Geography December 2012
Revenues are calculated based on Harding Loevner’s estimates of percentage geographic revenues for companies held in the portfolio for the latest fiscal year. Portfolio weights are calculated based on MSCI classification of stocks by country/region at June 2013.
Since revenues/region for the MSCI All Country World Index are not available, this analysis does not include a comparison of Portfolio vs Index revenues/region.
Emerging & Frontier Markets Correlations
Source: Citigroup: https://ir.citi.com/SBETdAQAynlg1TAJ39qgHy0vrBj%2BYF%2FYjPXm0ih7QZcKnimhExiD5A%3D%3D
Risk – Developed Markets, EM & Frontier
-10 -5 0 5 10 15 20 25
Total Projected Risk
Region Country Industry Fundamental Currency Covariance Specific Risk
Developed Markets Emerging Markets Frontier Markets
Source: Wilshire Atlas (Data as of March 31, 2014)
Contributions to Total Projected Risk
Expected Returns
Source: GMO
*The chart represents real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward-looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward-looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time.
Actual results may differ materially from those anticipated in forward-looking statements. US inflation is assumed to mean revert to long-term inflation of 2.2% over 15 years.
