A bubble in emerging markets is it really fear?
It is true that global growth is driven by emerging markets, whose weight in world GDP will soon be 50%. Alongside the weighting of emerging markets in global financial markets gradually caught up, which should encourage investors from developed markets to rebalance their portfolios to benefit from these regions structurally underweight. For now, their weightings in the indices remain significantly below their weight in world GDP.
The fear of formation of a bubble has its origins in the difficulties to detect: it finds the existence of a bubble until it bursts. As Alan Greenspan said: "Currently, economists are unable to provide a strong reversal of sentiment. A collapse in confidence is generally described as the bursting of a bubble, an event that becomes undeniable to post only. "
The TMT bubble has lasted seven years, after recorded an absolute performance of over 1200%, a cumulative outperformance versus the S & P 500 by nearly 1000% (equivalent to an annualized outperformance of 39%). The Japanese bubble lasted nine years, after recorded an absolute performance of over 500%, a cumulative outperformance versus the MSCI World index by almost 250% (equivalent to an annualized outperformance of 15%). The Asian Tigers bubble lasted three years, after recorded an absolute performance of over 630%, a cumulative outperformance versus the MSCI World Index by over 600% (equivalent to an annualized outperformance of 110%).
We compared this performance with that of emerging markets between 2001 and 2007 to determine if we could describe this latest speculative bubble: the rise of emerging markets has lasted six years, after recorded an absolute performance of over 400% or a cumulative outperformance of the MSCI World index by almost 350% (equivalent to an annualized outperformance of 28%). These performances are quite close to those of a bubble, and if it were a bubble, it has already exploded. But we never saw the formation of a bubble so soon after the breakup of the former.
So you do not feel that these markets are expensive?
In terms of fundamental value, it should be noted that the ratio P / BV (Price / book value, estimated in 2010) has remained broadly in line with historical levels since 2003, compared with estimates of ROE (Return on Equity) 2010. Furthermore, compared to other regions, the emerging market valuations are not excessive given the current ratio ROE. The ratio P / BV is not only a reflection of the value creation, but also the projected growth in the long term. With a ROE equal to that of the United States, emerging markets deserve a better value. It is easy to justify the current valuation of the MSCI Emergent, given its current profitability compared to other regions and because it is based neither on growth nor a hypothetical predictive performance.
On a quantitative basis, the existence of a bubble is not justified by the level, far from excessive valuations, or the dividend yield.
Recently, the Chinese growth and higher inflation expectations have led investors to fear a cycle of monetary tightening more aggressively than expected. Despite good economic statistics more and more analysts are concerned about the situation in China. Investors pessimistic crystallize their attention on China and often compare a hypothetical bubble Chinese Japanese bubble of the late 1980s. Indeed, the Japanese case is interesting because it is the latest example of the structural development of a country that has finally burst the bubble.
Can we baptize China the "new Japan"? In terms of valuations, the PEX 2010, Chinese A shares is estimated at about 18 now, against 70 in Japan during the bubble of the 1980s.
They talk about real estate bubble in China ...
The living space of urban Chinese has increased rapidly, reaching a level close to that of Singapore or Japan (30 m2 per capita). However, property investments are expected in cities: 200 million Chinese migrant workers and renovations are needed on the flats had been built hastily in the early 1980s.
In terms of access to housing, the ratio of the average price of a home divided by the annual income of a household is 10 in China (compared to 4 / 5 in most developed economies and 18 in Japan in 1990 ). Based on income buyers, the ratio is close to that of a developed economy. The main problem is that the offer was for the premium segment while the needs of the general public are not satisfied. In 2010, property investment should remain strong, with growth in double digits. The government has taken measures to curb speculation: limit the ratio of debt buyers, improving bank risk management, increased supply of land and property in smaller cities and housing supply good market.
The risk of Chinese real estate sector is also limited by the method of financing property purchases: the price increase has been fueled by credit expansion, real estate is mostly financed by savings (1 / 4 buyers do not rely on debt).
The risk of formation of a bubble in Chinese real estate market is real but the bubble is far from being effective, it is the Chinese government to manage that risk to prevent the drift of prices. On the other hand, property values have already been corrected and a lot of negative news is already incorporated.
What concerns about the risk of overcapacity?
The risk of overcapacity is another problem China, highlighted by the most pessimistic. Investment in fixed assets accounted for 47% of GDP last year. China overinvestment and wasted it does? The country boasts of having registered the highest growth in twenty years of the variable total factor productivity (TFP). If China was as wasted as the Soviet Union, developments in productivity would be negative. Even in sectors with overcapacity, like steel, the country still operating at a capacity of 72% last year down cycle. In infrastructure, when compared with the situation in the United States a century ago, China, whose area is the same but whose population is three times greater, have 110 000 km of railways by 2010, against 400 000 in America in 1916.
Another way of looking at things is that overcapacity China affects the rest of the world. China is competitive, and markets are increasingly globalized, open a new factory in China will create excess capacity elsewhere in the world, in a country less competitive.
The main risk we identify currently China is the evolution of the U.S. dollar and the increased risk aversion, due to fears by the indebtedness of the states.
It is true that global growth is driven by emerging markets, whose weight in world GDP will soon be 50%. Alongside the weighting of emerging markets in global financial markets gradually caught up, which should encourage investors from developed markets to rebalance their portfolios to benefit from these regions structurally underweight. For now, their weightings in the indices remain significantly below their weight in world GDP.
The fear of formation of a bubble has its origins in the difficulties to detect: it finds the existence of a bubble until it bursts. As Alan Greenspan said: "Currently, economists are unable to provide a strong reversal of sentiment. A collapse in confidence is generally described as the bursting of a bubble, an event that becomes undeniable to post only. "
The TMT bubble has lasted seven years, after recorded an absolute performance of over 1200%, a cumulative outperformance versus the S & P 500 by nearly 1000% (equivalent to an annualized outperformance of 39%). The Japanese bubble lasted nine years, after recorded an absolute performance of over 500%, a cumulative outperformance versus the MSCI World index by almost 250% (equivalent to an annualized outperformance of 15%). The Asian Tigers bubble lasted three years, after recorded an absolute performance of over 630%, a cumulative outperformance versus the MSCI World Index by over 600% (equivalent to an annualized outperformance of 110%).
We compared this performance with that of emerging markets between 2001 and 2007 to determine if we could describe this latest speculative bubble: the rise of emerging markets has lasted six years, after recorded an absolute performance of over 400% or a cumulative outperformance of the MSCI World index by almost 350% (equivalent to an annualized outperformance of 28%). These performances are quite close to those of a bubble, and if it were a bubble, it has already exploded. But we never saw the formation of a bubble so soon after the breakup of the former.
So you do not feel that these markets are expensive?
In terms of fundamental value, it should be noted that the ratio P / BV (Price / book value, estimated in 2010) has remained broadly in line with historical levels since 2003, compared with estimates of ROE (Return on Equity) 2010. Furthermore, compared to other regions, the emerging market valuations are not excessive given the current ratio ROE. The ratio P / BV is not only a reflection of the value creation, but also the projected growth in the long term. With a ROE equal to that of the United States, emerging markets deserve a better value. It is easy to justify the current valuation of the MSCI Emergent, given its current profitability compared to other regions and because it is based neither on growth nor a hypothetical predictive performance.
On a quantitative basis, the existence of a bubble is not justified by the level, far from excessive valuations, or the dividend yield.
Recently, the Chinese growth and higher inflation expectations have led investors to fear a cycle of monetary tightening more aggressively than expected. Despite good economic statistics more and more analysts are concerned about the situation in China. Investors pessimistic crystallize their attention on China and often compare a hypothetical bubble Chinese Japanese bubble of the late 1980s. Indeed, the Japanese case is interesting because it is the latest example of the structural development of a country that has finally burst the bubble.
Can we baptize China the "new Japan"? In terms of valuations, the PEX 2010, Chinese A shares is estimated at about 18 now, against 70 in Japan during the bubble of the 1980s.
They talk about real estate bubble in China ...
The living space of urban Chinese has increased rapidly, reaching a level close to that of Singapore or Japan (30 m2 per capita). However, property investments are expected in cities: 200 million Chinese migrant workers and renovations are needed on the flats had been built hastily in the early 1980s.
In terms of access to housing, the ratio of the average price of a home divided by the annual income of a household is 10 in China (compared to 4 / 5 in most developed economies and 18 in Japan in 1990 ). Based on income buyers, the ratio is close to that of a developed economy. The main problem is that the offer was for the premium segment while the needs of the general public are not satisfied. In 2010, property investment should remain strong, with growth in double digits. The government has taken measures to curb speculation: limit the ratio of debt buyers, improving bank risk management, increased supply of land and property in smaller cities and housing supply good market.
The risk of Chinese real estate sector is also limited by the method of financing property purchases: the price increase has been fueled by credit expansion, real estate is mostly financed by savings (1 / 4 buyers do not rely on debt).
The risk of formation of a bubble in Chinese real estate market is real but the bubble is far from being effective, it is the Chinese government to manage that risk to prevent the drift of prices. On the other hand, property values have already been corrected and a lot of negative news is already incorporated.
What concerns about the risk of overcapacity?
The risk of overcapacity is another problem China, highlighted by the most pessimistic. Investment in fixed assets accounted for 47% of GDP last year. China overinvestment and wasted it does? The country boasts of having registered the highest growth in twenty years of the variable total factor productivity (TFP). If China was as wasted as the Soviet Union, developments in productivity would be negative. Even in sectors with overcapacity, like steel, the country still operating at a capacity of 72% last year down cycle. In infrastructure, when compared with the situation in the United States a century ago, China, whose area is the same but whose population is three times greater, have 110 000 km of railways by 2010, against 400 000 in America in 1916.
Another way of looking at things is that overcapacity China affects the rest of the world. China is competitive, and markets are increasingly globalized, open a new factory in China will create excess capacity elsewhere in the world, in a country less competitive.
The main risk we identify currently China is the evolution of the U.S. dollar and the increased risk aversion, due to fears by the indebtedness of the states.
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