axa fram emerging mkts citywire event final
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Julian Thompson, Fund Manager of the AXA Framlington Emerging Markets Fund
Opportunities in Emerging Market equities
17627 09/13
This communication is for professional advisers only and must not be relied upon by retail clients. Circulation must be restricted accordingly.
Global Emerging markets – where are we?
Cost of capital now rising globally as US economy recovers
Increased pressure on emerging market central banks to raise rates as capital
flows out
Most emerging economies are in good shape but there may be some
casualties
Cost of credit for emerging economies (bps)
Source: Bloomberg as at 06/09/2013.
0
2
4
6
8
10
12
14
Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13
per
cent
age
po
ints
US 10 YEAR BOND YIELD EMBI SOVEREIGN SPREAD OVERALL SOVEREIGN COST OF CAPITAL
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High yield currencies under pressure
Source: Bloomberg as at 06/09/2013.
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Little visibility on near term growth
Growth has been surprisingly weak; rate
rises do not help
Little room for fiscal stimulus this time
around in larger economies
Varied response from Central Banks on
monetary policy
Markets in very different economic cycles
with their own particular domestic issues
– Banking sector in China
– Policy paralysis in India
– Political intereference in Brazil
Interest rates in major markets (%)
Graph source: Bloomberg as at 05/09/2013.
0
5
10
15
20
25
Apr-09 Apr-10 Apr-11 Apr-12 Apr-13
BRAZIL SELIC rate
India 3 month deposit rate
CHINA Bank ReserveRequirements
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China: Misallocation of Capital
Capital has long been mispriced in China
Leading to overinvestment, especially in
real estate
Government trying to address this issue
with gradual banking sector liberalisation
This probably means lower growth in the
short-term but averts a bigger crisis further
down the line
Consumption has slowed but remains
positive
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Ordos, China: a ghost city example
China banking sector no longer able to support infrastructure
investment
Source: Bloomberg as at 31/07/2013. RMB = Renminbi yuan
0
5
10
15
20
25
30
35
40
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13
Monthly volume of new loans in China (Bn. Yuan, LHS) Growth in existing stock of total bank loans (%, RHS)
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But some signs of life in manufacturing sector
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Source: Bloomberg as at 31/08/2013.
30
35
40
45
50
55
60
65
Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13
HSBC NEW ORDERS PMI CHINA MANUFACTURING PMI
Signs of a pick up in the export sector
Source: Bloomberg as at 31/08/2013. 3mma = 3-month moving average; y-o-y = year-on-year
Export growth (3mma) (% change y-o-y)
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13
%
KOREA TAIWAN CHINA BRAZIL MEXICO
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0 5 10 15 20 25
Brazil
Mexico
Other Latin America
China
India
Korea
Indonesia
Malaysia
Taiwan
Thailand
Other Asia/Pacific
Russia
Other Europe
South Africa
Turkey
Other Africa/Middle East
Other EM
Environment calls for increased country differentiation
Strong differentiation between countries
and currencies based on external capital
requirement
Pressure on politicians to introduce
structural reform
Politics handicapping some markets
– Turkey, India
Focus on markets where reform is on the
agenda or likely
– China, Mexico, Thailand
Korea and Taiwan to benefit from a pick up
in manufacturing cycle but corporate
governance remains an issue
Benchmark
Fund
Source: AXA IM as at 31/07/2013.*Refers to AXA Framlington Emerging Markets.
Weight %
Countries we like*
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Mexico is an attractive investment destination
Audi to invest US$1.15bn in new state of
the art plant in Puebla
Will be main production facility globally for
Q5, exporting to US and to Germany
150,000 units annually beginning 2016
Creates 20,000 jobs including indirect
labour
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“More than a dozen locations were looked at….Site conditions, logistics links, infrastructure, well qualified
employees and living quality – these were the decisive criteria for the choice of location”
Audi press release, 5 Sept 5 2012
Not to mention competitive wages….
Mexico: recovery in manufacturing underpinned by economic reform
Enormous change in political environment
One of the few reform stories in Emerging
Markets
Potential GDP growth could hit 5% in
3 years time
Infrastructure, energy, education and
competition are all part of reform
programme
Regained competitiveness vs China
Increasing integration with US economy
Source: Morgan Stanley LatAm Economics – Chart source: as at:31/01/2013 3mma = 3-month moving average ; y-o-y = year-on-year
Mexico’s share of US imports (% of US imports, 3mma seasonally adjusted)
Unit labour costs in manufacturing (3mma, % change y-o-y)
8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
12.5%
Jul-00 Oct-01 Jan-03 Apr-04 Jul-05 Oct-06 Jan-08 Apr-09 Jul-10 Oct-11 Jan-13
Manufacturing ex-Auto Total Manufacturing
-28%
-24%
-20%
-16%
-12%
-8%
-4%
0%
4%
8%
Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
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-40
-30
-20
-10
0
10
20
30
40
50
60
Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13
Domestic demand (% q/q, saar) GDP (% q/q, saar)
Thailand: sustainable growth in domestic demand
Political environment favours growth in
rural areas
Fiscal policy driving consumption
Strong investment supporting growth
Liquid, well capitalised banking sector with
low credit penetration
Source: National Economic and Social Development Board/Haver Analytics as at 30/06/2013.
Domestic Demand & GDP
Government Contribution
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-30
-20
-10
0
10
20
30
Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13
GDP: Government (% y/y)
Turkey: high external financing requirement
Large current account deficit leaves Turkey
exposed to financing flows
Real interest rates close to zero
Political unrest not helpful given financing
requirement
Banking sector will suffer from higher
interest rates given duration gap
Central Bank reluctant to raise interest
rates for political reasons
Source: Bloomberg as at 31/08/2013.
Turkey : trade balance
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-15,000
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-12
Jan-13
US
$b
n.
Exports Imports Trade Balance
AXA Framlington Emerging Markets – portfolio as at 31/07/2013
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Large Cap => 8bn USD
Medium Cap 1–8bn USD
Small Cap =< 1bn USD
Source: AXA IM as at 31/07/2013. Comparative benchmark: MSCI Emerging Markets. Active share can be defined by the proportion of stock
holdings in the composition of a portfolio which is different from the composition found in its comparative benchmark (MSCI Emerging Markets)
The greater the difference between the asset composition of the fund and its comparative benchmark, the greater the active share.
Market capitalisation breakdown (%)
1.8%
3.1%
28.1%
67.0%
0.0%
0.2%
27.5%
72.3%
0% 20% 40% 60% 80% 100%
Cash
Small Cap
Medium Cap
Large Cap
MSCI Emerging Markets
AXA Framlington Emerging Markets
Top 10 active positionsFund
%
Comparative
benchmark
%
Relative
%
Baidu 3.2 0.0 3.2
Bank of Georgia 3.1 0.0 3.1
Kimberly-Clark de Mexico 3.0 0.1 2.8
Bolsa Mexicana de Valores 2.7 0.0 2.7
Grupo Televisa 2.6 0.4 2.3
TATA Consultancy Services 2.5 0.4 2.1
Arca Continental 2.2 0.1 2.1
Belle International Holdings 2.3 0.2 2.1
Sberbank 3.0 0.9 2.1
CP ALL PCL 2.2 0.1 2.0
TOTAL 26.8 2.3 24.5
% of active share 77%
Number of stocks 66
Sector allocation
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Breakdown by sector (%) Relative exposure by sector (%)
AXA Framlington Emerging Markets MSCI Emerging Markets
Source: Factset using TBR Methodology Data & end of day data as at 31/07/2013. Comparative benchmark: MSCI Emerging Markets.
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Consumer Discretionary
Consumer Staples
Information Technology
Industrials
Health Care
Telecommunication Services
Financials
Utilities
Energy
Materials0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Financials
InformationTechnology
ConsumerDiscretionary
Consumer Staples
Industrials
TelecommunicationServices
Energy
Health Care
Materials
Utilities
Breakdown by country (%)
Country and regional breakdown allocation
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Relative exposure by region & country (%)
MSCI Emerging Markets
Source: AXA IM as at 31/07/2013. Comparative benchmark: MSCI Emerging Markets.
0 5 10 15 20 25
Brazil
Mexico
Other Latin America
China
India
Korea
Indonesia
Malaysia
Taiwan
Thailand
Other Asia/Pacific
Russia
Other Europe
South Africa
Turkey
Other Africa/Middle East
Other EM-8 -6 -4 -2 0 2 4 6 8 10
Mexico
Thailand
Georgia
Peru
China & Hong Kong
Chile
South Africa
Malaysia
Korea
Taiwan
AXA Framlington Emerging Markets
-10 -5 0 5 10 15
Latin America
Europe
Africa/Middle East
Asia Pacific
AXA Framlington Emerging Markets strategy – track record
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Source: AXA IM as at 31/07/2013. Basis: bid to bid, net income, net of fees in GBP. Comparative benchmark : MSCI Emerging
Markets. Dependant on the date this presentation has been prepared, the information presented may be different to the current figures.
NB: Past performance is not a guide to future performance.
10Y Net Performance
50
100
150
200
250
300
350
400
450
500
Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13
AXA Framlington Emerging Markets (net) in GBP MSCI Emerging Markets
Performance (%) net in GBP YTD 1Yr 2Yrs 3Yrs 5Yrs
AXA Framlington Emerging Markets UT Net GBP 0.4 7.0 -4.7 5.8 27.8
MSCI Emerging Markets NR GBP -2.0 5.4 -5.0 6.5 34.3
Excess over comparative benchmark 2.4 1.7 0.3 -0.7 -6.4
Quartile vs IMA Global Emerging Markets 2 2 2 2 3
Disclaimer
This communication is intended for professional advisers’ use only and should not be relied upon by retail clients. Circulation must be restricted
accordingly. Any reproduction of this information, in whole or in part, is prohibited.
This communication does not constitute an offer to sell or buy any units in the Fund. Information relating to investments is based on research and analysis
undertaken or procured by AXA Investment Managers UK Limited for its own purposes and may have been made available to other members of the AXA IM
Group of Companies which, in turn, may have acted on it. Whilst every care is taken over these comments, no responsibility is accepted for errors and
omissions that may be contained therein. It is therefore not to be taken as a recommendation to enter into any investment transactions.
This communication should not be regarded as an offer, solicitation, invitation or recommendation to subscribe for any AXA IM investment service or product
and is provided to you for information purposes only. The views expressed do not constitute investment advice and do not necessarily represent the views of
any company within the AXA Investment Managers Group and may be subject to change without notice. No representation or warranty (including liability
towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein.
Information relating to investments may have been based on research and analysis undertaken or procured by AXA Framlington for its own purposes and may
have been made available to other expertises within the AXA Investment Managers Group, who in turn may have acted upon it. Information in this document
may be updated from time to time and may vary from previous or future published versions of this document.
Past performance is not a guide to future performance. The value of investments and the income from them can fluctuate and investors may not get back the
amount originally invested. Changes in exchange rates will affect the value of investments made overseas. Investments in newer markets and smaller
companies offer the possibility of higher returns but may also involve a higher degree of risk. An initial charge is usually made when you purchase units. Your
investment should be for the medium to long term i.e. typically 5-10 years.
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