So far in 2018 an emerging market investor has seen macroeconomic and geopolitical factors dominate front and centre. The list includes: Fed rate hikes, US China trade war risks, twin deficits and currency devaluations in Turkey and Argentina, economic sanctions on Russia, unpredictable political outcomes in Mexico, Brazil, Malaysia, and the prospect of denuclearizing North Korea.
Against this backdrop it is easy to forget that the main driver of EM equity returns is typically stock specific factors.
Breaking down emerging market returns
Of course, macro does matter, but as the chart below shows it accounts for no more than half of the story at most, and this is particularly so at market extremes.
Over the past c.20 years, stock specific risk has accounted for the majority of emerging market returns.
Emerging market returns breakdown
Source: Deutsch Bank, May 2018
So why is so much discussion centred on macro?
Well, by and large, I would argue it is because for most people talking about macro and geopolitics is easier than in-depth company analysis. For example, discussing the political situation in India or the crisis in Turkey is much more interesting than talking about the supply/demand balance of the Chinese cement market. (Although members in our team would certainly dispute that!). Also, countries and macro considerations are something you can visit and see. If you visit Brazil, you can arguably form an assessment of Brazil as a country and its culture. It is something one can actually experience. The MSCI EM Utilities index is not palpable in the same way and the financial statements of its constituents are not particularly memorable for most observers. Additionally, macro is largely what the media concentrates on. For example, mainstream news channels will focus on Russia’s political interactions with the West, rather than the encouraging shareholder return policies implemented by many Russian oil producers.
Economic growth is not the same as stock market growth
Despite the overinflated extent to which we discuss macro, the reality is that there is only a minor link between GDP growth and stock market returns. GDP growth can drive earnings, but the stock market’s growth is not the same as the economic growth. In particular, this thinking ignores valuations as the starting point, which can be a significant driver of stock prices. It is true, however, that actual GDP growth and market returns display a positive link in most instances (Korea being the exception that proves the rule in the left hand chart below). This however is an ex-post analysis. As investors in the present moment, we only have access to GDP forecasts and unfortunately as the right hand chart below shows these are very poor predictors of stock market returns.
Realised GDP is linked to market returns... but not forecasts, which are often wrong
Source: UBS, May 2018
So if stock markets are mainly driven by stock specific risk, and economic forecasts are largely futile, why bother looking at macro data? Of course macro matters but as we said already mainly at the extremes. And by extremes, we mean at points of financial and economic crisis. We work closely with Pictet Asset Management’s economics department to monitor 7 key indicators that have preceded previous financial crises. They are considered relative to their history and relative to other economies. The key benefit of these indicators is they can help us calibrate the conviction of our stock picks and determine critical areas of risk. For example, over the years Chinese financials, and property names in particular, should have been caught up in some crisis by now if we had listened to the macro headlines. But the reality is that these sectors have outperformed global emerging markets.
Volatility has clearly returned to global markets, and in the emerging world the volatility is often amplified due to the economic and political precariousness of specific countries. More than ever, focusing on what really matters is critical – and most of the time that is stock picking. So to answer my initial headline. Yes, macro matters some of the time when picking EM stocks but never more than stock-specific, ‘microeconomic’ factors.
About
John Moorhead
About
John Moorhead
An ardent believer in value investing, John Moorhead has been looking at emerging market stocks through the value lens since joining Pictet Asset Management as a Materials analyst in 2008. His research-focused background is most evident in the influence he has had in shaping the group’s rigorous investment process. In addition to his responsibilities as Head of Emerging Equities, John is also part of the portfolio management teams for the Global Emerging Markets and the Global Emerging Market High Dividend strategies. John graduated with a Bachelor of Mining Engineering (Hons) from the University of Queensland and holds a Graduate Diploma from the Securities Institute of Australia. He is a CFA charterholder.
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.
This website uses cookies to enhance user navigation and to collect statistical data. To refuse the use of cookies, change your settings or for more information, please click on the following link: Cookies policy. By continuing to browse this website, you accept the use of cookies for the above purposes.
