Tuesday, 23 February 2016

MINT - The new BRIC

Economist Jim O’Neill will forever be associated with the term BRIC, which he coined as an acronym for Brazil, Russia, India and China (now including South Africa to make BRICS). Now there is a new one: the MINT countries.

Mint? This term refers to Mexico, Indonesia, Nigeria and Turkey. They are bound by a few key themes: young populations, useful geographical placement, and (Turkey excepted) big commodity producers that should make these big economic powerhouses.

Personally I have mixed feelings about the MINTs, and also think that any use of this idea as an investment theme ought to take into account just what’s happened to the BRICS in recent years.
The good news. Mexico and Nigeria have some of the best prospects in all emerging markets. Nigeria, in particular, is thought to be in an economic sweet spot and has gathered increasing attention from world investors over the last year. It will soon prove to be the biggest economy in Africa, bigger even than South Africa. Even without reform GDP has grown by 7% a year since 2000. There are considerable challenges, from corruption to theft of natural resources, but Nigeria is a high-population market of growing wealth and opportunity.

Mexico, too, is increasingly the Latin American market that investors like most. It is increasingly common for investors to say they like Mexico “because it isn’t Brazil”, and although that remark is naturally a bit flippant, there is some truth in it: whereas Brazilian companies have tended to be sluggish and mired in state policy, Mexico’s benefit from market-friendly reforms and a sense of national momentum under President Enrique Pena Nieto, expected to attract steady increases in foreign investment.

The thing about Indonesia and Turkey, though, is that they are both the market darlings of about two years ago. Back then, Indonesia was much the most adored market in Asia by both debt and equity investors: a country that had made the successful transition from military dictatorship to democracy, and which had elected a stable and admired government; a very strong domestic demand story which insulated it from the global financial crisis; a young demographic; and plentiful supplies of coal at a time when China’s need for fuel had never been greater. But several things have since gone wrong. The fiscal picture has been damaged by twin deficits, the currency has fallen, concerns have grown about foreign outflows from the country and there has been disappointing progress in infrastructure development.

Then there’s Turkey. In November, the IMF put out a report on Turkey saying that it “can only sustain high growth at the expense of growing external imbalances.” It called for a mighty 250 basis point rate hike in the key policy rate, one of the most aggressive IMF reports in memory. Turkey’s inflation rate is close to 8%, and it also faces deficit problems and a weakening currency. There are some who think there is a meltdown coming in Turkey.

One point about these countries is their location: Indonesia as the heart of Southeast Asia, Mexico benefiting from proximity to the USA, Turkey with its combination of eastern and western attributes, and Nigeria as the most buoyant illustration of a rising African continent. It’s true that these locations do have a likely positive impact on trade.

Overall the outlook for these countries is very strong – but it could be 2030 before we see their strengths truly emerge so a long term view is definitely required. As always you should assess the suitability of any investments according to your risk preference and overall long term goals.

Monday, 8 February 2016

Ideas for long-term investors concerned about market volatility

Following a turbulent start to 2016, these long-term investment ideas can block out the noise of several concerns. These include the slowdown in China’s growth rate and the fragility of its financial system, the rout in oil, gas and industrial commodity prices, the prospect of defaults in US high yield bonds, concerns about the solvency of European banks and uncertainty around the UK’s forthcoming “Brexit” referendum.

While we went into 2016 with a cautious outlook and believe the current volatility could continue for some time, we also believe that recent declines make for a far more attractive entry point for long-term investors. No one knows how long this current turmoil will continue but history suggests that markets tend to overshoot on both the way up and the way down. We are close to a point where the exodus out of equities is herd-like rather than driven by fundamental factors.

There are a number of solutions that investors might consider this quarter. In volatile markets, absolute return funds should be high up investor’s radars to both help reduce overall portfolio volatility and enable them to back managers who can utilise a wider set of tools to deliver returns. For investors looking for a strategy aimed at generating positive returns that are not dependent on general market movements, we favour multi-strategy targeted absolute return funds. 

For equity investment consider Europe. While we think the year could remain a volatile one for equities, Europe is our preferred equity market at the moment as the policy environment remains very supportive for shares. The European Central Bank has adopted negative interest rates and is already engaged in a QE stimulus programme which it may well accelerate. Furthermore, low energy prices are also a positive for Western Europe, as a net importer of oil and gas. 

In uncertain times back big brands. With the global growth outlook weakening, there’s a strong case for focusing on high quality brands, as these business typically command loyalty that can prove resilient through the economic cycle and which provides a high barrier to competition.

Play a defensive game in the UK. Many British investors naturally gravitate to UK funds, but the road ahead could be rocky, with the upcoming Brexit vote generating uncertainty. This is most likely to be felt in sterling, which has already weakened in recent times, and in Foreign Direct Investment, but don’t forget that the UK equity market is very international in nature and not particularly reflective of the domestic economy at all. Ironically a weaker pound could help massage UK-listed company dividend pay-outs for sterling investors, as many UK-listed firms earn most of their revenues outside of the UK.

Could Asia/emerging markets be the “wild card”? We’ve been particularly cautious on Asia and Emerging Markets for a long time now, as they have faced significant headwinds both from the slowdown in China but also as the dollar strengthened in expectations of a US rate hiking cycle which has made the costs of servicing dollar denominated debt, very painful.

Yet we may now be nearing a point where so much negativity is priced in, that these markets could be the “wild card” for 2016, for bargain hunters. While these markets have looked “cheap” for some time, we think that market expectations of a normal US rate hiking cycle are rapidly evaporating and there is even a chance of further easing. A weakening Dollar will provide a relief to these markets but set against this is the risk of a further deterioration in China and a deeper devaluation of its currency.

As always seek advice where appropriate.