This week our article, from The Financial Times, takes a look at Emerging Markets.
EM consumer stocks hit as retail dream fadesBy James Kynge
Impact of higher interest rates set to be protracted
The emerging market consumer, so the narrative went, would dazzle the global investor as they indulged their retail dreams, buying everything from designer T-shirts in Brazil to convenience store goods in Russia and cars in China made by a company known as BYD, which stands for “Build Your Dreams”.
Investors who rode such aspirations have seen stellar returns. The MSCI Emerging Markets Consumer Discretionary index, which aggregates the share prices of leading EM consumer companies, has risen 250 per cent since its 2009 trough. By contrast, the broader MSCI emerging markets index has risen only 69.61 per cent in the same period.
Now, however, one of the most successful investor narratives since the 2008 financial crisis is coming back down to earth, according to consumer surveys in several emerging markets, investment bank analysts and some fund managers.
“There isn’t much fundamental reason in the near term to be optimistic about consumer spending in emerging markets,” says David Lubin, head of emerging markets economics at Citi.
A spreading dynamic, Mr Lubin says, is responsible for the more sober outlook. Central banks have hiked interest rates to defend their depreciating currencies, reducing the willingness of consumers to borrow to buy consumer goods. That, in turn, has hit consumer stocks.
Michael Power, strategist at Investec Asset Management, says the impact of higher interest rates is likely to be most pronounced and protracted in countries that run current account deficits and are vulnerable to the slacker global demand for commodities that is flowing from China’s economic slowdown.
These countries include Brazil and Turkey, which have seen their respective consumer stock indices fall 6.4 per cent and 12.3 per cent so far this year. “In Turkey consumer credit growth seems poised for a very sharp slowdown in the wake of the January rate hike,” says Mr Lubin.
South Africa, which also falls into this category, has performed somewhat better – with its consumer stocks rising 5.4 per cent – partly because the rebound in the rand’s value against the dollar has helped shore up sentiment.
Russia, where the consumer stock index has fallen 26.6 per cent so far this year, is the worst EM performer. Investor sentiment has, of course, been rattled by geopolitical nervousness over the future of Ukraine, but economic issues are also contributing to the sell-off in Russian equities. A sharp hike in interest rates to defend the rouble is seen as likely to hit consumer spending in coming weeks, fund managers say.
Indonesia, which runs a current account deficit and has exposure to the Chinese economy, has bucked the trend this year, with its consumer goods index rising 14.2 per cent so far this year. One reason, analysts say, is that its central bank – encouraged by an improving current account picture – has held rates steady this year.
According to survey of consumers in Indonesia by Asean Confidential, a research service at the Financial Times, consumer sentiment in Indonesia is holding up. Asean Confidential’s discretionary spending index for Indonesia went to 88.3 in February, up from 87.9 in December – marking a break with the wider Asean region, which saw a slight easing in consumer sentiment. Malaysia and Thailand look particularly reluctant to maintain the high pitch of credit-fuelled spending of the past few years.
China, too, shows signs of slowing consumer credit absorption. A China Confidential survey showed a fall in its future discretionary spending index in February to 74.8, down from 75.5 in January, signifying a moderation in spending plans. The consumer borrowing index also eased to 72.5 in February from 75.9 in January, suggesting households are increasingly cautious over consumer credit.
This may account for some of the souring sentiment around Chinese car companies, many of which are among the poorest performing stocks in the MSCI consumer index this year. Geely cars is down 27 per cent and Great Wall cars is down 23 per cent.
Fiona Manning, senior investment manager at Aberdeen Asset Management, urges caution in looking ahead. “Investors now seem much less focused on fundamentals and more on newsflow, and they are really quite nervous,” she says.
In her view the emerging consumer story is a long-range, structural shift, which is not going to be thrown off course by cyclical issues that the market is currently encountering.
Sam Sweitzer, CFA │Principal│ANSON CAPITAL, INC.│