Honors Thesis Presentation - "An Analysis of Emerging Markets"


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This is a PowerPoint Presentation of my Honors Thesis. I presented this in front of three Hofstra Professors, including the chairperson of the Hofstra Finance Department. I received High Departmental Honors as a result of my research.

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  • According to a study done by Citywire Analysis, Brazil has been the nation of choice for some of the best emerging market investment managers over the past five years. (Simpson)
  • Young females in Brazil are joining the workforce and declaring their financial freedom. (Consumer Lifestyles: Brazil) They have become a unique consumer sector as they have taken advantage of career opportunities and have spearheaded consumer demand in household items
  • As you can see in this graph, the Asia-Pacific region of Hong Kong, Philippines, South Korea, Thailand, Vietnam, China continue to export more to their own region than any other region.
  • Recently, the Vietnamese government has announced that they intend to privatize government-owned firmsVietnam’s annual average income dramatically increased from 7,907,330 Vietnam Dongs in 2005 to 15,684,284 Vietnam Dongs in 2009. (Vietnam: Consumer Lifestyles) Annual disposable income nearly doubled from 6,689,701 in 2005 to 13,360,354 in 2009. (Vietnam: Consumer Lifestyles) A powerful aspect of the Vietnamese economy is that almost 60% of the population is under the age of 30. Annual disposable income nearly doubled from 6,689,701 in 2005 to 13,360,354 in 2009. (Vietnam: Consumer Lifestyles) A powerful aspect of the Vietnamese economy is that almost 60% of the population is under the age of 30. (Vietnam: Consumer Lifestyles) They are taking advantage of increased annual disposable incomes. (Vietnam: Consumer Lifestyles) This can be reflected in the rapid rise in Internet and mobile phone usage. Internet usage in Vietnam has increased by 112.5% since 2005. (Vietnam: Consumer Lifestyles) Mobile phones went from taking up 7.5% of all households in 2005 to 27.5% of Vietnamese homes in 2009.
  • South Korea has recoverd tremendously from the global economic crisis.South Korea’s GDP Growth Percentage was 5.7% in 2010. This is a tremendous recovery from a meager 01% total in 2009. Consumer lending has increased by 19.1% between 2005-2009. The annual average income of citi
  • It is the 2nd best place in the world to do business in. Wealthy Businessman pay a meager amount of taxes and business competittion is very limited.Hong Kong exports approximately 51% of it’s exports to China. Therefore, the recovery of China helped to reinvograte the trading relationship between China and Hong Kong. Unemployment rate has dropped and consumer lending has increased.GDP’s growth rate was 6.0%, a recovery from the -2.8% contraction in 2009
  • I found that the most prevailing strategy is the Bottom-Up Strategy. A bottom-up strategy focuses on detailed company research and fundamental analysis.Investment managers at the Templeton Small-Cap Emerging Market Fund visit up to 1500 firms per year in order to evaluate a firm’s administration. Along with fundamental research and bottom-up stock selection, a common strategy that is currently used by investment managers is to find underpriced emerging market equities through price-multiple analysis. Templeton Investment managers looked at the price-earnings ratio as a key ratio in which to find value stocks for their portfolio. (FRANKLIN TEMPLETON) In the Dimensional Fund Advisors Core Portfolio, investment managers determine a stock’s value in a mutual fund portfolio via the price-earnings ratio, price to cash flow ratio and its book to market value. (Emerging Markets Core Portfolio) In addition, investment managers seek the equities with effective profitability. Virtus Emerging Markets Opportunities Fund screen equities with a sufficient return on equity and return on assets.
  • Causeway Funds combines a detailed research for firms with superior earnings forecasts that are attractively priced with the tactic of finding a nation with strong macroeconomic factors such as GDP and industrial protection statistics.Schroeder’s analyzes a nation’s valuation through price-multiple analysis. It also looks at the nation’s potential growth through earnings growth and return on earnings. (Schroeders Fund) Schroeder also looks at a country’s exchange rate, GDP and real interest rate. At the same time, Schroeder’s incorporates detailed fundamental research on firms. (Schroeders Fund) They use a detailed valuation model that generates forecasts for three-year earnings and cash flows. In addition, they use price-multiple ratios such as price to cash flow and price to net asset value. (Schroeders Fund)
  • I decided to take two approaches to finding which mutual fund equity holdings were driving the emerging market sector the most. The first three equity holdings were stocks that I frequently found as top holdings in diversified emerging equity mutual fund holdings. There were unavoidable. Vale SA, Samsung, Taiwan Semiconductor Manufacturing are examples of stocks that I found time and time again. The other list was found through a look at the top percentage returns of 26 mutual funds. Out of these 26 mutual funds, these equities were most frequently found in the top ten percentage returns. Gazprom, HTC Corporation and the Kia Motors Corporation were the equities that were most frequently found among the lists. These emerging market equities have had an impact on emerging markets for a long time. Samsung Electronics, HTC Corporation and Taiwan Semiconductor Manufacturing were listed as the Top 25 Emerging Market Mulitinationals in a book written by Antoine Von Agtmael….called the “Emerging Markets Century”this is the same person who coined the tern”emerging markets”
  • Vale SA was a world leader in metals and mining firm in the world in terms of market capitalization.A critical aspect of Vale’s growth strategy is mineral exploration. The company travels to more than twenty nations across the world to secure new natural resources and find many key metalsVale operates in the following lines of business: ferrous minerals, (iron ore, manganese ore) non ferrous minerals, (nickel, copper, aluminum, fertilizer nutrients) coal and infrastructure.Vale has combined its logistics strategy with its mining ventures. (Vale Across the World) They utilize railroads, ports and nautical means of transport in order to help transport key metals to strategic areas. Currently, Vale has nine ports and terminals used for its logistics strategy. Vale has invested 9 billion dollars towards its logistics strategy in the past 6 years. Vale operates in the following lines of business: ferrous minerals, (iron ore, manganese ore) non ferrous minerals, (nickel, copper, aluminum, fertilizer nutrients) coal and infrastructure. (Vale-Mining) Vale is the globe’s largest iron ore producer as well as one of the world’s top nickel producers.
  • Semiconductors, Digital Machines, Media, TVs, CELL Phones, Laptops, Blu-Ray and DVD Players. It’s the goal of earning 400 billion dollars in revenue by 2020. Samsung also hoped to become the second most recgonizable brand by 2020.
  • In microelectronics, the foundry model refers to the separation of a semiconductor fabrication plant operation from an integrated circuitdesign operation, into separate companies or business units.This company is the world’s first dedicated semiconductor foundry.TSMC expanded into the solar and lighting industries in 2009 to get involved with renewable energy and green industries. The circuit foundry expanded into the solar and lighting industries in 2009.Their quality management system is emphasized by 6 major processes: design services, wafer manufacturing, mask masking, backend service, customer satisfaction and technology development
  • The department that is responsible for gas delivery to foreign consumers is Gazprom’s Central Operations and Dispatch Department, which is responsible for the gas supply of Russia. (Central Operations and Dispatch Department) The firm also hopes to use its geographic setting to capitalize on business in the markets of Europe and Asia.
  • HTC was originally built to be a maker of mobile handsets.First Palm Size Color PC in 1999Microsoft 3G Phone in 2005.HTC was named the 31st most inventive firm according to Fast Company Magazine in February 2010.
  • 356,268 units = This was more than 50,000 units more than what Kia Motors had sold in 2009. KiaKia also broke records in terms of revenue and overall profits.
  • It is an estimate of the potential percentage or dollar amount by which a security may fall in the near-term.
  • These downside risk results seem to be a clear indicator that emerging market mutual funds have a greater deal of risk and sensitivity when it comes to adverse market condition.
  • is a measurement of the additional profits made in excess of the riskless rate or a major benchmark index. This shows that mutual funds managers are constantly exceeding the risk-free rate of return or the returns of major indexes such as the MSCI Emerging Market Index.
  • Sp-i = Tracking error (standard deviation of the difference between returns of the portfolio and the returns of the index) A high information ratio measues the investment’s manager to generate returns that exceed the benchmark.
  • 0.5 to 1 = a great ratio.1 = an exceptional ratio. According to Research done by a CFA expert in 2009, The Median Information Ratio vs. the S and P 500 was 0.35. Thus, I decided to measure how many mutual funds were below the benchmark. 0.5 TO 1 = The final category underscores the difficulty of investment managers to obtain an exceptional ratio and dramatically outperform the benchmark.
  • A POSITIVE Jenson’s Alpha means that a portfoilio manager has thoroughly outperformed the market.
  • Price-Earnings Ratio - P/E RatioWhat Does Price-Earnings Ratio - P/E Ratio Mean?A valuation ratio of a company's current share price compared to its per-share earnings.Also sometimes known as "price multiple" or "earnings multiple". What Does Price-To-Book Ratio - P/B Ratio Mean?A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies  by industry.
  • MSCI Emerging Market Index Book Ratio = 2.1MSCI U.S Equity Index Book Ratio = 2.3MSCI Emerging Market Index P/E Ratio = 14.1MSCI U.S Equity Index P/E Ratio = 16.3
  • Aberdeen Asset Management pointed to the recent tightening of interest rates in the emerging markets of India, Hungary, South Korea and China. Columbia Emerging Markets Funds emphasized the urgency of inflationary pressures in emerging markets by pointing out that the consumer price indexes in emerging market nations are primarily geared food items. Oppenheimer Funds – stressed urgency of inflation situation by pointing out the amount of foof price items that take place in India and ChinaVan Eck Funds
  • China’s consumer price rose by 5.4% by March 2011. (IBTimes) Brazil’s consumer prices increase rose by 6.3% This marks the largest inflationary increase in three years (IBTimes) India’s consumer prices rose by nearly 9% as of March 2011. (IBTimes) South Korea’s CPI rose 4.7% in March 2011, the biggest monthly increase in more than two years. A recent report by the Institute of International Finance estimated that 1 trillion dollars of privately invested cash may reach emerging markets during this year. (Talley) In addition, a recent EPFR Global report showed that emerging market equity funds posted almost 1.6 billion dollars in a week in April. Recently, India has increased its interest rate for a ninth time in the past 15 months. (BBC News) They have recently increased their interest rate by 50 basis points to 7.25%. (BBC News) China’s central bank increased its interest rate on April 5th by 25 basis points to 6.31%. (Censky) On April 21st 2011, Brazil increased its interest rate by 0.25% to 12% in a grand effort to curb the inflation rate. (
  • Wells-Fargo Adventure Fund was underweight against the index in the materials sector by -2.84% and -4.31% and yet outpaced the index in 0.72% and 0.46% by return (Wells Fargo).. Invesco Emerging Markets Equity Funds noted that Russia and South Africa had spearheaded emerging market performance with double digit gains in the 4th quarter of 2010. (Invesco) Their increases were 16.5% and 13.12% respectively.
  • Honors Thesis Presentation - "An Analysis of Emerging Markets"

    1. 1. AN ANALYSIS OF EMERGING MARKETS<br />An in-depth look on the current status of emerging markets through the analysis of diversified emerging market equity mutual funds <br />
    2. 2. Emerging Market Characteristics<br />A nation with a low or medium per capita income<br />Speedy economic progression <br />Strong Middle Class<br />Increased Consumer Spending<br />Economic Reform<br />Increased FDI<br />
    3. 3. All examined mutual funds were from the “diversified emerging market equity fund”category.<br />
    4. 4. Diversified Emerging Market Equity Funds<br />Less concentrated than BRIC Funds.<br />Less concentrated than regional or sector funds <br />More emerging markets are taken into account.<br />
    5. 5. Where do emerging market managers mostly allocate their assets?<br />
    6. 6. Country Allocation<br />Brazil<br />Asia-Pacific Region<br />Vietnam<br />South Korea<br />Hong Kong<br />
    7. 7. BRAZIL’S GDP<br />
    8. 8. BRAZIL’S EXPORTS<br />Exports = $200 billion dollars <br />Main exports (Iron Ore, Iron, Petroleum, Raw Materials)<br />Trade Surplus = $20 billion dollars.<br />
    9. 9. Brazil’s Foreign Direct Investment<br />Heavy FDI from countries in the EuroZone. <br />Significant FDI inflows from China<br />$20 billion of FDI in first half of 2010<br />Invested in Infrastructure, Electrical Projects and Natural Resources<br />
    10. 10. BRAZIL’S STRONG MIDDLE CLASS<br />30 million Brazilians added to middle class in past ten years.<br />Successful anti-poverty programs<br />Increased wages, disposable income and consumer spending.<br />Young Brazilian Women = Unique Consumer Sector<br />Increased E-commerce sales and credit card usage.<br />
    11. 11. The strength of Brazil’s middle class.<br />
    12. 12. ASIA PACIFIC REGION<br />
    13. 13. ASIA-PACIFIC REGION<br />Massive amount of interregional trade<br />Hong Kong – 67.1% of exports<br />Thailand – 54.9% of exports.<br />Decreased dependence on Western Hemisphere.<br />Increase in GDP<br />8.0% GDP in 2010. <br />
    14. 14. Asia-Pacific Interregional Trade<br />
    15. 15. Asia-Pacific Economic Strength<br />
    16. 16. VIETNAM<br />Middle class prosperity and economic reform<br />Jumped 10 spots in the “Ease of Doing Business” World Ranking<br />Increase in average income and disposable income. <br />60% of the population is below the age of 30<br />
    17. 17. SOUTH KOREA<br />16th in the “Ease of Doing Business” ranking. <br />5.7% GDP Growth Percentage in 2010<br />Annual Average Income: 12,053,224 Won to 14,840,339 Won between 2005-2009<br />
    18. 18. HONG KONG<br />Ranked 2nd in “Ease of Doing Business” ranking<br />Benefited from the recovery of China<br />GDP Growth Percentage of 6.0%<br />
    19. 19. Strategies of Emerging Market Fund Managers<br />
    20. 20. Strategies of Emerging Market Fund Managers<br />Bottom-Up Strategy<br />Detailed Company Research<br />Templeton Small-Cap Emerging Market Fund<br />Fundamental Analysis<br />Dimensional Fund Advisors Core Portfolio – Price-Multiple Analysis<br />Virtus Emerging Markets Opportunities Fund – Profitability Ratios<br />
    21. 21. Strategies of Emerging Market Fund Managers<br />Combination of Bottom-Up and Top-Down Strategy<br />Causeway Funds <br />Alpha Model that is 2/3rd Firm Specific, 1/3rd Country Specific<br />Schroeder's Global Emerging Market Funds<br />Country Specific Factors<br />Exchange Rate, GDP and Interest Rate<br />Fundamental Research<br />Valuation Model for Three-Year Earnings Forecasts<br />
    22. 22. Major Equity Holdings<br />
    23. 23. Key Emerging Market Equity Holdings<br />Vale SA<br />Samsung<br />Taiwan Semiconductor Manufacturing<br />Frequently found in the top ten percentage of holdings.<br />Gazprom<br />HTC Corporation<br />Kia Motors Corporation<br />Found through a look of the percentage returns of 26 mutual funds.<br />
    24. 24. VALE SA<br />A world leader in metals and mining<br /> Significant emphasis on logistics strategy<br />9 billion dollars in the past 6 years.<br />Emphasis on Mineral Exploration<br />$5.92 billion dollars = 4th quarter profit of 2010. <br />
    25. 25. Vale‘s Success<br />
    26. 26. Vale‘s Success<br />
    27. 27. SAMSUNG<br />Vision 2020<br />Goal of earning 400 billion dollars in revenue in 2020.<br />Supreme Innovation<br />Created the world’s first ever 512 MB Dynamic RAM Drive <br />Released the first ever 3D TV Model in 2010.<br />Financial Superiority<br />41.87 trillion won in revenue = 4th quarter of 2010<br />2010 = Most successful year in terms of revenue. <br />
    28. 28. SAMSUNG<br />
    29. 29. Taiwan Semiconductor Manufacturing<br />World’s first dedicated semiconductor foundry<br />Expanded into the solar and lighting industries in 2009<br />Expansive Quality Management System<br />
    30. 30. Taiwan Semiconductor Manufacturing<br />
    31. 31. GAZPROM<br /><ul><li>Russian Government owns half of the company.
    32. 32. World leader in natural gas storage.
    33. 33. Reliable Gas Supplier
    34. 34. Owns 165 Gas Distribution Companies
    35. 35. Central Operations & Dispatch Department
    36. 36. Found as a top percentage returner in thirteen of the twenty-six mutual funds that were analyzed.</li></li></ul><li>GAZPROM<br />
    37. 37. HTC Corporation<br /><ul><li>Found in 1997 and is based in Taiwan
    38. 38. A model of innovation
    39. 39. Maker of First Palm Size Color PC and Microsoft 3G Phone
    40. 40. Found as a top returner in eleven of the 26 emerging market mutual funds analyzed.</li></li></ul><li>Success of HTC Corporation<br />
    41. 41. Success of HTC Corporation<br />
    42. 42. Kia Motors Corporation<br /><ul><li>Founded in 1944 and is based in South Korea
    43. 43. Amazing run of success
    44. 44. 15 consecutive years of added market share = 2010
    45. 45. Record sales in 2010 = 356,268 units.
    46. 46. 1st quarter of 2011 = best quarter ever in terms of sales.
    47. 47. Top percentage returner in nine of the twenty-six mutual funds that were analyzed.</li></li></ul><li>Kia Motors Success<br />
    48. 48. A Measure of Emerging Market Risk vs. Return<br />
    49. 49. Risk & Risk to Return Indicators<br />Risk Indicators<br />Downside Risk<br />Risk to Return Indicators<br />Excess Return<br />Information Ratio<br />Jenson’s Alpha<br />
    50. 50. Downside Risk<br />Measures the likelihood of an asset to decline in value as well as the extent of the asset’s decline.<br />Measurement:<br />Measured the downside risk of 39 emerging market funds vs the MSCI Emerging Market Index. (Source: Bloomberg)<br />Less or more than the benchmark?<br />
    51. 51. Downside Risk Results<br />26 of the 39 emerging market equity mutual funds had a downside risk that was higher than the benchmark.<br />
    52. 52. Risk to Return Factors - Excess Return<br />Measurement of the additional profits made in excess of the riskless rate or a major benchmark index. <br />Measured the excess returns of 42 emerging market funds vs the MSCI Emerging Market Index.<br />Positive or Negative?<br />
    53. 53. Excess Return Results<br />Positive Excess Returns on 24 Emerging Market Equity Funds<br />Negative Excess Returns on 18 Emerging Market Equity Funds<br />
    54. 54. Breakdown of Positive Excess Returns<br />
    55. 55. Risk to Return Indicator - Information Ratio<br /><ul><li>Measures the proportion of mutual fund portfolio returns that exceed major benchmarks returns against the volatility of those extra returns.
    56. 56. (Portfolio Return – Index Return)/Tracking Error
    57. 57. Measures the skill of mutual fund managers.
    58. 58. Measured the information ratios of 42 emerging market funds vs the MSCI Emerging Market Index.
    59. 59. Positive or Negative?</li></li></ul><li>Information Ratio Results<br />Mirrored the Excess Return Results = <br />24 Mutual Funds with Positive Information Ratios <br />18 Mutual Funds with Negative Information Ratios<br />
    60. 60. Breakdown of Positive Information Ratios <br />
    61. 61. Jensen’s Alpha<br />A measurement that calculates the distinction between the total return on a portfolio and the total portfolio return based on the CAPM.<br />Measured the Jenson’s Alpha ratios of 42 emerging market funds vs.the MSCI Emerging Market Index.<br />Positive or Negative?<br />
    62. 62. Jenson’s Alpha Results<br /> 22 Emerging Markets Funds with Positive Jenson’s Alpha Results 20Emerging Market Funds with Negative Jenson’s Alpha Results<br />
    63. 63. Summary of Results<br />Risk-to Return Results<br />Downside Risk Results<br /> 26 out of 39 mutual funds exceeded the MSCI Emerging Market Index<br />Excess Return = 24 positive excess returns out of 42 mutual funds.<br />Information Ratio = 24 positive information ratios out of 42 mutual funds.<br />Jensen’s Alpha = 22 positive Jenson’s Alpha out of 42 mutual funds.<br />
    64. 64. Are emerging markets overvalued or undervalued?<br />
    65. 65. Price-Multiple Analysis<br />Analyzed 41 mutual funds.<br />Benchmark = Peer Average (Source: Standard & Poors)<br />Price Multiple Ratios<br />Price to Earnings Ratio<br />Price to Book Ratio<br />
    66. 66. Results:<br />Price to Earnings Ratio = 24Undervalued, 17 Overvalued.<br />Price to Book Ratio = 25Undervalued, 16 Overvalued.<br />
    67. 67. Are emerging markets undervalued?<br />Emerging Market P/E Ratios underpriced vsstock indexes.<br />As of April 7th 2011 = Brazil, Indonesia, Mexico, South Africa and India. <br />MSCI Emerging Market Index undervalued vs. the MSCI U.S Equity Index.<br />
    68. 68. Outlook of Emerging Market Investment Managers<br />
    69. 69. Emerging Market Inflation Concerns<br /><ul><li>Aberdeen Asset Management
    70. 70. Highlighted recent tightening of interest rates in emerging markets (South Korea, India, Hungary)
    71. 71. Food Price Concerns
    72. 72. Columbia Funds – Inflationary pressures in emerging markets are primarily geared food items.
    73. 73. Oppenheimer Developing Markets Fund –Food Items take up 33% of shopping expenses of China and 46% of India.
    74. 74. Van Eck Funds –
    75. 75. Rise in commodity prices
    76. 76. Lowering of Interest Rates in the U.S
    77. 77. Monetary Inflows into Emerging Markets</li></li></ul><li> Emerging Market Inflation – A Major Problem<br />CPI Increases in Emerging Markets<br />South Korea = 4.7% Increase <br />Brazil = 6.3% Increase <br />China = 5.4% Increase<br />India = 9% Increase<br />Emerging Market Monetary Inflows<br />2011 = 1 Trillion Dollars of Monetary Inflows <br />Efforts of Emerging Market Central Banks <br />India = 9 interest rate increases in 15 months.<br />Interest Rate Increases by China and Brazil<br />
    78. 78. Rising commodity prices benefit energy and materials sectors.<br />Oppenheimer Developing Markets Fund <br />7.9% Weight, 23.4% Return = Materials Sector<br />Wells Fargo Adventure Fund<br />Outpaced Index in Return Despite being Underweight<br />Invesco Emerging Markets Fund<br />Success for Russia and South Africa<br />
    79. 79. Conclusion<br />
    80. 80. Status of Emerging Markets<br />Immense Future Potential<br /> Consumer Consumption<br />Emerging Market Middle Class spends 7 trillion dollars/year, $20 trillion/yr by 2020.<br />Price-Multiple Analysis Results = More Emerging Market Growth.<br />Emerging Market Risk is compensated with Return. <br />Risk vs. Return Analysis<br />Inflation = A huge impediment.<br />Central banks have a hard time stopping inflation.<br />Huge Monetary Inflows<br />Inflation will be solved – Continual Interest Rate Hikes<br />
    81. 81.
    82. 82. THE END<br />