Stock pickers do not usually agree on very much, but one thing they seem united on is that next year will be a tale of two emerging-market stocks – those companies in countries that will benefit from lower oil prices and those in oil-producing nations that will not.
Equity prices in Russia, the UAE and Qatar, some of the world’s biggest producers, have been battered in recent weeks by the plunge in crude because those countries are heavily reliant on oil. And that may affect government spending plans that their economies depend on, fund managers say.
Meanwhile, stocks in countries such as China, India, Turkey and Egypt, which have not been as badly hit amid a general rout in global equities, are those that portfolio managers say have the best chance of performing well in the new year. But if growth in China, the biggest emerging-market economy, cools even more, all bets may be off.
Oil has been declining, in part because of weakening demand from the world’s second-biggest economy as factories reduce output amid softening demand for the country’s exports. Along with Russia’s economic meltdown, that may lower global economic growth rates, in which case everyone will suffer, fund managers say.
“In emerging markets, the response to oil prices will be very diverse,” said Sachin Mohindra, a portfolio manager at Invest AD, an Abu Dhabi-based asset management firm.
“Certain emerging markets will be hit as there is weakness in their currency and they are looking very wobbly, but the biggest beneficiaries of this oil price weakness will be countries like India and Turkey. They are doing very well, whereas you have countries like Brazil which are wobbly.
He added: “The other big risk is China. If we see a blowout in China, then any emerging market that is directly or indirectly related to China will suffer.”
After Russia, which is in the throes of an economic meltdown amid sanctions and a weakening currency, UAE stocks have been among the hardest hit among the major oil producers. The UAE is the world’s eighth-biggest oil producer and the federal government funds more than 60 per cent of its budget from crude exports.
In the past month, Dubai's benchmark stock index has plunged 29 per cent, while the main stocks gauge in neighbouring Abu Dhabi has shed 13 per cent in the same period.
Oil itself has shed more than 45 per cent of its value this year amid increasing production in countries such as the United States and waning demand from global economic uncertainty. The drop in crude prices, also accompanied by a drop in other commodities such as steel, comes as demand from emerging markets wanes. That has been bad news for countries such as Brazil, Argentina and Chile that produce other commodities including coffee, tin, sugar, copper and wheat.
While falling oil prices may be a concern for the world’s biggest energy producers, such as Saudi Arabia and the UAE, it has been a blessing for poorer countries that do not have much oil and gas, such as India, because they do not have to spend as much money importing oil. All this has cheered global investors, who have poured more than US$13.8 billion into Indian equities this year.
Still, fund managers point out that among those markets that are dependent on oil, one should differentiate between those countries that have big reserves of cash, and those that don't.
“Within the energy exporters, you need to differentiate [between] the ones with vulnerable fiscal positions, such as Nigeria or Russia, and oil exporters with very strong fiscal positions such as countries that enjoy very large international currency reserves,” said Rami Sidani, the head of frontiers investments at the asset manager Schroders.
“And they also don’t have any sovereign debt, which means they can pursue their aggressive government spending despite the drop in oil prices because they can tap into their reserves.”
Mr Sidani added: “We remain constructive on the GCC, given they can weather the storm, we believe, and tap into their reserves, run a deficit and maybe even have some sovereign debt.
“We believe that their diversification plan and government spending is a long-term plan and shouldn’t be affected by a short- term drop in oil prices.”
For other fund managers, such as the emerging-market stock guru Mark Mobiusat the asset manager Franklin Templeton, beyond the background noise of a drop in oil and a crisis in Russia lies the unmistakable fact that emerging-market stocks as a whole are cheaper than the developed world. And unlike the developed world, emerging-market economies are poised for higher growth, he says.
“We believe continuing economic reform in many emerging markets could positively influence economic growth trends and corporate profitability,” said Mr Mobius, who helped to popularise investment into emerging markets in the 1980s.
“Stock valuations at a discount to those of developed markets do not accurately reflect the potential of emerging markets, in our opinion,” he said.
“High economic growth rates will remain a key attraction of many emerging markets, in our opinion,” Mr Mobius added.
“Even with major economies like Brazil and Russia slowing down, overall growth in emerging markets during 2015 is expected to be comfortably in excess of that achieved by developed markets, with China and India likely to drive the Asian region to particularly strong growth.”
The MSCI developing nation gauge has lost 9.5 per cent this year and trades at 1.3 times price- to-book ratio, the cheapest level since June last year. The MSCI World Index has declined 0.4 per cent and is valued at a multiple of 2.1.
In any given year however, the fortune of emerging markets, a moniker coined in the 1980s, can vary dramatically. This year the top 10 gaining stock markets in the world and the top 10 losers are equally littered with emerging and frontier market names.
At the bottom of the list, Russia and Greece lead the laggers, having dropped by 53 per cent and 32 per cent respectively.
At the other end of the spectrum, China, India and Egypt have gained 41 per cent, 22 per cent and 16 per cent respectively.
The price of oil will be a major factor in determining the leaders and laggers in the year ahead.
mkassem@thenational.ae
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