Emerging Markets 2012: Bull or Bear?

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This is a good time to take on the issue of emerging markets and how they’re going to perform in 2012.

To put some professional perspective into place, we quote two fund managers, one from Morgan Stanley and another from Deutsche Bank (via Financial Times). Here they are:

1. The Bull: Jonathan Garner, Chief Asian and Emerging Market Equity Strategist at Morgan Stanley

2. The Bear: John-Paul Smith of Deutsche Bank

The “Bullish” case (only highlights, via FT):

… EM equities unlike their DM peers have been in an earnings-driven secular bull market. In 2011 EM US dollar earnings per share set a new post global recession high some 6 per cent above the prior peak, outperforming other regional equity indices in this regard. 

On the valuation side, EM’s forward price to earnings multiple of 9.5 times is now the second lowest of the major equity regions … our base case forecast for emerging economies to grow GDP by 5.7 per cent in 2012 versus just 1.2 per cent in the G10. Hence, we have recently advised clients to adopt a fully invested stance for the first time since October 2008. There is around 30 per cent upside to our scenario weighted Target Price for 2012.

China’s recent surprise 50bps reduction in its Reserve Requirement Ratio (RRR) may act as a catalyst for better market performance … in 2008, the easing of RRR restrictions was followed by an acceleration in the growth rate of bank lending and strong performance from MSCI China and emerging market equities more generally. 


The “Bearish” case (only highlights, via FT):

Emerging market equities look cheap to us on earnings and asset based valuations in both absolute terms and relative to DM, but expensive on cashflow multiples; we expect cashflow to come under increasing pressure within Global Emerging Markets (GEM)… Investors generally appear too optimistic about the prospects for monetary and fiscal easing within the emerging economies – we think that the Chinese economy may be about to experience the start of something close to a hard landing… we would forecast underperformance of a similar order of magnitude to 2011 relative to DM.

… markets will be volatile next year because of uncertainty about policies in the eurozone and elsewhere,  fund managers’ desire to avoid losses in difficult times, and likely swings in the oil price. All this will disturb EM equities more than DM.


On China, the consensus is too optimistic for 2012, and a hard land is possible, given concerns about inflation, the health of the banks,  and recent signs of an “incipient flight” of money out of China, despite the tough capital controls. There is limited scope for fiscal or monetary loosening elsewhere in the EM world, given the persistence of inflation. Outlook for commodities is negative.
Our comment:

John-Paul “The Bear” Smith views are worth considering as he was right in his calls for 2011. In December 2010, when most EM equity strategists were bullish, he said that EMs were entering “a period of secular underperformance”, and he was right considering that EM stock markets are underperforming DMs by 17%.
As for Jonathan “The Bull” Garner, it is within his duties at Morgan Stanley to “sell” the Emerging Markets growth story, as he would probably loose his job if he said otherwise. So, obviously, there is some conflict of interest…
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