Last week saw me spoiled for choice on topics to tackle as the new year got properly underway.
Britain’s retailers were announcing their experience of the Christmas season, with predictably mixed results. Sainsbury’s and John Lewis seemed to have got it right, M&S delivered mixed signals, Tesco found it tough and Morrison’s downright difficult. Interestingly, part of Morrison’s problems was ascribed to their weak online offering – a clear indication of how things have changed over recent years.
But it was emerging markets that made most of the running as commentators fell over each other to predict what 2014 might have in store for these fallen Masters of the Universe.
Certainly, the bare numbers did not make encouraging reading. The MSCI EM Index fell by 1 per cent during December and ended the year little changed on the start of 2013. Contrast that with a near 17 per cent rise in the FTSE All-Share index, a return approaching 30 per cent in the S&P 500 and a gain of more than 50 per cent in Japan’s Nikkei 225.
On cue, economist Jim O’Neil – he once of Goldman Sachs who first coined the acronym BRIC – started a series on BBC Radio 4 on the Mint economies. This is one slick description to which he cannot lay claim – Fidelity coined the term for the nations of Mexico, Indonesia, Nigeria and Turkey several years ago. But the argument was much the same. Aspirant countries with large populations playing catch up with the developed world.
The dynamics are a little different, of course. In the Brics, China and India have huge populations while Russia and Brazil are not so populous but have extensive natural resources.
The four MINT countries are big – Indonesia is the fourth most populous nation in the world – but it is their location that singles them out. Mexico, adjacent to the US, Indonesia, at the heart of emerging Asia, with resource rich Australia nearby, Nigeria, the largest country in Africa and Turkey on the crossroads from Europe to Asia, but with Africa close at hand.
Not so very long ago I chaired a series of conferences for Cofunds at which fund managers were invited to share their views on where to invest, based upon a variety of underlying themes. Some emerging markets’ specialists laid claim to their area of expertise being suitable in any set of circumstances, simply because these markets could and would outdistance the developed world over almost any set of circumstances. For a while they looked to be on the money, but last year ushered in a period of reassessment.
Part of the problem lay with valuation criteria. At one stage investors were prepared to pay premium ratings for the local subsidiaries of multi-national giants – in some cases, a significant multiple of that of the parent concern. But it is debt that has unsettled sentiment – debt accumulated at a time when interest rates have been low and money created by central banks all too easily available.
Knowing that this period is drawing to a close has forced investors to re-examine their exposure. The underlying promise of these markets remains but the pain of adjusting to a new world order could yet wreak havoc in the most vulnerable areas. Unfortunately, one of these is China, adding to the concerns that surround this increasingly important component of the world economy. 2014 could be an interesting year.
Meanwhile, the Bank of England kept interest rates on hold last week, while we learned that the Federal Reserve Bank’s Open Markets Committee had voted almost unanimously to taper quantitative easing. It is always difficult to reach sensible conclusions at the beginning of the year when so much still has to be revealed but the outline is beginning to emerge. I see no reason to alter last week’s cautiously optimistic stance – yet, at any rate.
Brian Tora is an associate with investment managers JM Finn & Co