FLASH REPORT: Emerging Markets & Global Resources Update
October 31, 2011
 inancial markets continue to experience unprecedented
volatility. The major macroeconomic
issues of the day, especially the European debt crisis,
continue to dominate headlines and market activity. As
a result, most financial assets are well valued assuming
a satisfactory resolution to these issues. October’s
13.3% return for the MSCI Emerging Markets Index
was the highest monthly gain since May 2009.
News regarding the Chinese economy has also
impacted stock markets across the globe. As is often
the case with China, observers often disagree about
even the most basic points. The Chinese economy is
clearly slowing, as a direct result of announced policy
actions by the government. Some have viewed the
9.1% GDP as evidence of a “hard landing,” with uncertain
consequences for equities. Chinese stocks have
fallen this year, but generally in line with emerging
market equities. We continue to believe the following
regarding China:
1) The current slowdown has been engineered by
the government, which has the ability to amend
policy if needed. There is always the risk of a
policy misstep by the Chinese authorities, but we
do not believe there is evidence of one currently.
2) The concern regarding overvaluation of Chinese
property is misplaced. What was so devastating
to the US economy was not declining property
values but high levels of leverage throughout the
system. This was compounded by financial engineering
and securitization through CDOs. These
concepts are unknown in China and in emerging
markets by and large.
3) China is a net lender, not a creditor. It is the largest
FX reserve owner, holding roughly 30% of the
world’s foreign exchange reserves, the bulk in US
dollars and euros. China does not need assistance
from the often fickle global markets; to the
contrary, US and European countries are looking
to China for funds.
4) As a rapidly growing and urbanizing country,
China is in the midst of a large infrastructure
buildout. There may be isolated cases of front
loading in rail, airports and roads, but by and
large most projects have led to China becoming
the most efficient manufacturing center globally.
At some point, there will be a reallocation
of assets and liabilities in China to resolve any
surplus infrastructure investments. The impact of
this reallocation should be limited. Newgate’s Portfolios remained nearly fully invested
through this recent volatility. By doing so, we captured
the rebound in the markets, up 17.39%* in
the Emerging Markets Portfolio and 21.75%* in the
Global Resources Portfolio for October, compared to
13.26% for the MSCI Emerging Markets Index and
6.62% for the DJ-UBS Commodity Index, respectively.
We remain invested so as not to miss the potentially
sharp and sudden recoveries and because we have
conviction about what the world will look like once
the headline issues subside. It’s a world where people
still use basic commodities to power their houses, cars
and places of business, and where people in emerging
nations strive for a better life. Depending on the
country, that may mean a second meal at the table or
a second car in the garage.
Newgate’s Portfolios hold companies that are the
direct beneficiaries of this pursuit. It is difficult to
take a long term perspective during these periods of
extreme volatility. We believe that a well managed,
diversified investment in emerging markets or natural
resource equity stocks has the potential to generate
long-term returns. |
