Booster Client Update - Spot the Difference: What Defines an Emerging Economy?
Spot the Difference: What Defines an Emerging Economy?
In global markets the terms “emerging markets” or “emerging economy” are used broadly to describe countries that have lower income levels per citizen and generally experience a lower standard of living compared to a “developed” country. China has been the poster child for emerging economies over the past 25 years, as the country has seen massive growth and changes in its economy: GDP has grown from US$360 billion in 1992 to over US$8 trillion today. The World Bank’s definition of an emerging economy is one that has per capita income levels below US$15k over the past 3 years (New Zealand’s is US$37k). China is currently at US$15k – while in line with the threshold, this number masks the underlying data; there are currently over 40 million Chinese citizens that earn more than the average New Zealander!
Share market index providers use additional criteria to classify developed over emerging economies, including the accessibility, openness and stability of their markets. This keeps China classed as an emerging market, despite reaching the income threshold. While this should change over the next decade, today there are still many great investing opportunities in China, so your global share investments already include a 10% allocation to emerging markets.
This reflects that despite the criteria, the long-term growth outlook for emerging markets make them a great investment opportunity. If you travel today to any of China’s dozen largest cities, you may be surprised to find you have just arrived in one of the most advanced cities in the world. This can be seen in the skyline photos below comparing Shanghai and New York; emerging vs developed: Can you spot the difference?
Market & Portfolio Update – June
- June was a fairly quiet month for world share markets, with most investment funds relatively flat – although this capped off a solid overall first half of the year. Our own NZ share market was the stand-out, helping to offset the effect of a further 3% rise in the NZ Dollar on the value of overseas share investments.
- The NZ Dollar’s rise was in tandem with higher long-term market interest rates, as European Central Bank President Mario Draghi acknowledged that the European economy has been growing well – this was seen as hinting at official interest rate hikes moving closer.
- More generally, a number of risk factors facing markets have not turned out as badly as initially feared over the past two years. Together with good economic fundamentals, this has supported funds slightly increasing their global share investments during June.
- We also added shares in Swiss company Givaudan, a well-entrenched provider of fragrances and food products around the world. The change was funded by selling some shares in Louis Vuitton Moet Hennessy, locking in strong gains over the past year.
Summary of Key Portfolio Changes
Global Shares – Increased Allocation
- During June we made a measured increase to the global shares allocation within diversified funds. Over the past two years the key risks facing global share markets have declined significantly. These include the outlook for Europe improving greatly, as fears from the Euro crisis fade, and emerging markets growth levels stabilising.
- However, the main story is not in risk reductions but in the global economy’s outlook for expansion picking up solidly. This economic performance is being coupled with corporate earnings showing robust growth and earnings momentum at its highest level in 6 years.
- While risks are ever-present and will return at some point, these pillars are supporting global equity markets performance and the prospect of them outperforming their long run averages over the medium term.
Global Direct Shares
- During June we reduced the allocation to Louis Vuitton Moet Hennessy. The company remains strong with their well-known brands and management’s focus on operational performance, while giving the underlying subsidiaries freedom to be creative has driven its operating profit margins in excess of 40%. While the business remains a core long term holding in the portfolio, given the share price is up over 60% in the past year, we have taken the opportunity to crystallise some profits as the valuation has risen.
- To offset this reduction, we have added Givaudan, a Swiss “chemical” company we have been monitoring for the past year. While classed as a “chemical” company, Givaudan are actually the global market leader in the attractive Fragrances & Flavours industry. This market grows consistently and steadily at about 2-3% each year, as consumer companies bring over 35,000 new products to the market annually. The company has a strong operational track record, and spend hundreds of millions on Research & Development each year. This innovation has led to them to generating the highest margins in the industry, which has driven an excellent history of returning cash to shareholders.
Australian Shares Portfolio
- We added packaging company Amcor to the portfolio. Amcor makes packages for various products, including pretty much every food product thinkable as well as more specialised industrial and healthcare packaging. The outlook for Amcor has become more favourable recently with substantial exposure to the recovering European and US economies.
NZ Fixed Interest Portfolio
- We continued to fine-tune fixed interest holdings, increasing holdings in both Government and bank bonds whilst reducing council bonds.
There are several drivers of returns from investing in companies. The main two are from a company growing their earnings over time and from paying dividends to shareholders. But recently in New Zealand we have seen instances of another driver of returns - takeovers.