Latest Emerging Market Viewpoints
From Matt Linsey and the North of South Capital team
Are commodity prices less relevant for our asset class? Over the past ten years the weighting of energy, oil and gas and mining has fallen by more than 50% to less than 15.0% of our index. At the same time technology, including internet stocks, has more than doubled to where it accounts to close to a quarter of our index.
This change in index composition is very reflective of what we have seen in the developed markets over the same period. It is also an indicator of the decreased relative importance of commodity exports for many countries in our index. Russia remains the most dependent market in the index with oil and gas exports accounting for approximately 50 % of total exports. Despite its important role in international relations (and domestic U.S. politics!!!!) Russia’s weighting is relatively small in our index, at only 3.1%. Mexico, traditionally viewed as very dependent on its oil industry, has managed to diversify its economy to the point where oil accounts for less than 5.0 % of total exports.
Within Latin America, Brazil now is the market with the highest dependence on commodities, which account for almost 50% of all exports. Brazil’s oil and gas exports have almost doubled over the past five years, to the point where they account for approximately 7.0% of the country’s total exports.
Asia remains the region least dependent on commodities as a revenue source, with only Indonesia and Malaysia relying heavily on their export. Commodity related products account for more than 50% of Indonesia’s exports, with oil and gas alone accounting for almost 20% of the total. Malaysia is somewhat less dependent, as commodities only account for about a third of total exports.
The region that is clearly the most dependent on commodity related exports (almost entirely oil) remains the Middle East. With most of the markets in the region either considered as frontier or out of the indexes entirely (Saudi Arabia) their impact on the performance of our asset class is negligible.
Although most of the countries in our index have managed to successfully diversity their export revenue away from an overdependence on commodities, the price of the underlying commodity remains a good indicator, although less important than in the past, of overall global demand.
The price of oil, particularly when volatile, has a significant influence on the performance of the overall emerging market index. This was clearly seen during 2015, when weak prices caused fears of a Petrobras bankruptcy. The result was a significant increase in credit spreads across our asset class, even amongst those countries and corporates that benefit from lower oil prices.
Although the oil price has stabilised over the past year, the continued exploitation of shale and resurgence Libyan and Nigerian production this year has almost exactly counterbalanced OPEC’s agreement to cut supply, resulting in a trend towards weaker oil prices. Unless OPEC agrees to further cuts in supply it is hard to envision the oil price trading above $60 in the near term. The good news is the markets have become quite comfortable with a price between $40 and $60. As long as it remains within this range the impact on share prices should be minimal.
Although we do not have a particularly strong view on the outlook for copper prices, on stock we find particularly attractive is Bouganville Copper based in Papau New Guinea and listed on the Australian market. In the 1970’s they controlled the largest single mine of copper in the world. A civil war and anti-mining politics ended up closing the mine. Today there is a much improved political situation, and an increasing likelihood of some kind of mine re-start. Although there is a significant amount of investment needed, the company’s current market capitalisation of approximately $125 million does not adequately reflect a truly world class copper-gold asset.
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