Michael Hartnett, Chief Global Emerging Markets Strategist, Merrill Lynch is interviewed by Bloomberg TV, December 12, 2008 (click to view below), regarding his outlook for Emerging Markets in 2009. Here is a summary of that conversation:
- Volatility of all markets has meant that correlations have been very high.
- It's been fiendishly difficult for EM to break away decisively from what's going on in Washington and New York.
- China is a big factor that could help the rest of the EM break away.
- In China there's a raging debacle over what the economy will do next year.
- People are quite pessimistic about what's happening.
- If the Chinese economy is able to come back more quickly and more strongly than a number of other economies around the world, that probably would be the moment you'd see the other EMs break away (from the high correlation).
- (anchor) Jim O'Neill from GS said that he likes China now for the first time in a while.
- We've been overweight China since the end of August.
- Its been a good trade thus far, with A shares and Hang Seng up nicely.
- Its not because China is going to be fabulously strong growth wise - those markets love when they get lots of liquidity.
- That's what's happening at the moment - There is a big easing of monetary policy and credit policy.
- The RMB is expected to remain robust.
- China is the one equity market where the banks have outfperformed.
- It doesn't feel as if there's an impediment to the stimulus that you're getting from the Chinese government - I think the Chinese market will outperform next year.
- The consumer theme is very strong in China, and Emerging Markets.
- If you go back a year ago, we were worried about inflation. Why?
- Inflation compromises the purchasing power of the billions of consumers in these markets .
- They couldn't afford to spend on anything but food, and food prices were going through the roof. Its the complete opposite of that now. Oil is at $40, not $140 and food prices have come down a lot.
- There's a lot of purchasing power in China, India - obviously there's a cycle as well - its not as if the numbers are going monstrously higher.
- Today (12/12/08) we saw China report a 20%+ increase in retail year-over-year. That's incredible when you consider that we're in a global recession.
- We think the demand story is there.
- In non-Emerging Markets there are a lot of US and European companies that are going to benefit enormously from the consumer story in EM.
- Thinking laterally, there are a number of companies outside the EM that can benefit from that relative growth.
- The other story in the EM - You've got a number of countries that are attempting to reflate forcefully - India, Korea, South Africa, Brazil.
- There are going to be opportunities in all of those countries.
- The other thing to think about is the "Best Companies," the "Best in Breed," concept.
- We think the best in breed idea will be a big outperformer next year.
Where not to invest? (for now)
- There are a number of countries that have large current account deficits and you have to worry about how they are going to fund those deficits.
- There are some currencies, particularly in the Eastern European region to avoid.
- Russia has a big problem right now, as it has destroyed a great deal of shareholder trust.
- At some point next year, when the rouble troughs, and oil prices trough, Russia is going to move up significantly.
- At the moment we recommending that our clients take their money out of Russia.
- They have a big problem there like Saudi Arabia; they're a one trick pony.
- As long as oil prices were strong so was the economy, but with the lower oil price the economy has weakened.
- Unless we get the oil price moving up in a strong fashion, its going to be very hard to persuade investors to put a large chunk of capital there.
- Certain places like Iceland and Hungary have gone to the IMF - its going to be very difficult for those economies to come back in a meaningful way.
Opportunities in Emerging Markets?
- India, Korea, Turkey and South Africa were taken to the brink by markets and now there are a lot of swap lines to support them.
- What they're doing in these countries is something almost revolutionary.
- They have big deficits, they're currencies have gone down a lot, and guess what they're doing?
- They're cutting interest rates - (and they have lots of room to do it).
- If they can convince the markets that their interest rate cuts can rescue their growth situations - those currencies are going to do very well.
- In India for example, Industrial Production fell and policy formation (favours profound monetary easing).
- India has great companies.
- our clients are increasing their weightings from being underweight most of the last year since markets were overvalued and earnings expectations were too high in contrast to the idea that the economy could not do well in the context of high oil prices.
- Now oil prices have fallen, and the current account deficit is improving and they're cutting interest rates.
- They are increasing their weightings to neutral, if not, overweight at the moment.
Rule of Thumb?
o We like large , not small companies.
o Looking for decent balance sheets, good management, and good brand.
o Survivors who can gain market share from those affected by the global credit crunch.
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