Emerging Markets Outlook: Will Emerging Markets Continue Their Run in 2013?

A number of times we have been asked whether emerging markets will continue their run in 2013. Our response typically begins with the following clarification: "Emerging markets" may be a handy way to refer to the countries that constitute a generally recognized asset class, but this group is far from monolithic. Widely differing levels of development, economic drivers, opportunities to invest, and returns exist under the emerging markets umbrella. For this reason it's not entirely correct to imply that "emerging markets" had a run in 2012. Some markets, such as Thailand, Turkey and the Philippines performed extremely well, while others such as Brazil, Russia, and China lagged.

Given the above, a more appropriate way to frame the question would be, "Will emerging markets continue to offer attractive investment opportunities in 2013?" To that question we would certainly answer, "Yes."

We are most positive on the prospects for Southeast Asia and Mexico. Other areas we will closely monitor include South Africa and India, while we have concerns regarding Brazil and China. At this point we should note that we are, first and foremost, stock analysts rather than macroeconomists. Excellent investments can be uncovered in poorly performing countries, while being headquartered in a strongly performing country does not guarantee success.

Having said that, Southeast Asia is the region with the best opportunity to support economic activity through increased domestic consumption. Following years of recovery from the 1997 Asian currency crisis, the region now boasts government finances, as well as corporate and personal balance sheets, of a quality to which Europe's southern tier (or the United States for that matter) can only longingly aspire. With the possible exception of Singapore, all of the countries in the Association of South East Asian Nations (ASEAN) are anticipated to undertake much-needed major infrastructure upgrades – be it communications, transportation, power generation, or water infrastructure. They may also benefit from the efforts of several Pacific Rim countries (including the U.S.) to establish a Trans-Pacific Partnership leading to significantly enhanced trading and investment opportunities.

Gross Government Debt As a Percentage of GDP









United States






Source: International Monetary Fund

Not only do Southeast Asian nations have the need to develop their infrastructure, they also have the means to do so. Contrast the government debt levels of the four ASEAN countries listed above with their more developed counterparts.

ASEAN demographics are also attractive relative to the developed world and even relative to other developing countries such as China, which is feeling the effects of its three-decade-old one-child policy.

The Philippines, in particular, has a young population and a strongly performing economy. Its third quarter year-on-year GDP growth rate of 7.1%¹ was above expectations and represents the third consecutive quarter of 6%+ GDP expansion. The country has enjoyed rising credit ratings and may become investment grade in 2013. The Philippines receives huge remittances ($20 billion annually²) from its army of overseas workers. In President Noynoy Aquino the country has a leader committed to rooting out corruption, increasing transparency, and bringing good governance to the archipelago - something sorely missing during previous administrations. These developments have been welcomed by steady appreciation of the Philippine peso versus the U.S. dollar and strong stock market returns.

The development of Vietnam, Cambodia, and, most recently, the positive moves made by Myanmar, also bode well for the region's economic future. Although equity investment opportunities are currently limited, the productive potential of long suppressed peoples is being unleashed. These countries will also benefit from rising costs in China as labor intensive manufacturing shifts to less expensive locales.

Outside of ASEAN, we like the prospects in Mexico, Turkey, South Africa, and India. Mexico, with its large, underemployed population and its proximity to the U.S. is strategically positioned to benefit from the rising costs of producing in and shipping from China. In more and more of our meetings with company managements we hear of strength in their Mexican operations. While the drug trade and violence are undoubtedly serious negatives, and security requirements are a drag on productivity, the desire for smaller-run, made to order manufacturing, lean inventories, and quick, efficient shipping to the U.S. are right in Mexico's wheelhouse. In 2012 the Mexican stock market enjoyed double-digit returns, while the Mexican peso also strengthened against the U.S. dollar.

Turkey remains a key emerging market for 2013, with its strategic geographic locale, 75 million-strong population, open markets, and continuing political evolution. Certain of Turkey's manufacturing activities are suffering due to the reliance on Europe as an export market but, like ASEAN, there are substantial domestic investment opportunities as well as a fairly broad and deep equity market available to foreign investors.

South Africa and India are our two dark horse markets for 2013. As the most developed economy in Africa, the former offers world-class companies, good management, the broadest equity market, and access to what is arguably the least developed continent on Earth (Antarctica excepted). While there's little to show to date, the Johannesburg Stock Exchange's goal to develop an African Board to attract listings from across the continent could be interesting.

India presents a conundrum in that the Indian diaspora has been one of the most economically successful groups in history. Unfortunately, overbearing regulation, identity-based politics, and byzantine bureaucracy hamstring domestic economic progress. As has been said, the British brought bureaucracy to India and the Indians perfected it. Political reform or improved governance in India would be a positive sign for investors.

Governance is a recurring theme in emerging markets, bringing us to our list of unattractive countries. In Brazil, President Rousseff has implemented a number of confidence-damaging statist policies. She has strong-armed the Central Bank of Brazil on interest rates, maintained domestic fuel subsidies, and presented power generation companies with a no-win scenario by imposing price reductions as a condition of license renewal. The effects have been felt in both the currency market and the equity market, as the Brazilian real, unlike the Thai baht, Philippine peso, or Mexican peso, depreciated against the U.S. dollar in 2012.

Nor are we enthusiastic about China's prospects. After a long period of underperformance beginning in 2009, the Shanghai A Share Index rebounded toward the end of 2012. Nonetheless, rising costs, a still over-supplied property sector, and the hangover from the world's biggest post-crisis stimulus program as a percentage of GDP do not paint an attractive scenario.

As investors, we are ever mindful that emerging markets don't run as a pack any more than developed markets. There will always be front-runners and laggards, while our task remains to identify the best opportunities regardless of locale.


1 Philippine GDP growth at two-year high of 7.1%, Business World Online, November 28, 2012.


2 Remo, Michelle. Overseas Filipino remittances up by 5% to P10 B in 1st half, Business Inquirer, August 15, 2012.


Copyright 2013 Saturna Capital Corporation and/or its affiliates. All rights reserved. Vol. 7 · No. 2

Saturna Capital publishes From The Yardarm Market Commentary & Analysis monthly. To subscribe, click here.

Saturna Capital does not share subscriber information with third parties.

Important Disclaimers and Disclosures

This report is intended only for the information of the reader, and is not to be used for or considered as an offer or the solicitation of an offer to sell or buy any securities or other financial instruments of any kind, including without limitation, any mutual fund or other product offered, sponsored, created, or managed by Saturna Capital Corporation or its subsidiaries or affiliates ("Saturna"). This report is not intended for distribution to, or use by, any person or entity who is a citizen or resident of, or located in, any locality, state, country, or other jurisdiction in which such distribution, publication, availability, or use would be contrary to law or regulation or which would subject Saturna to any registration or licensing requirement within such jurisdiction.

This document should not be considered as providing investment advice or services, or any service offered by Saturna. Saturna may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. Saturna will not treat recipients as its customers by virtue of their reading or receiving the report.

Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to a particular investor's circumstances or otherwise constitutes a personal recommendation to any investor. Saturna does not offer advice on the tax consequences of any investment.

All material presented in this report, unless specifically indicated otherwise, is under copyright to Saturna. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of Saturna. Unless otherwise indicated, all trademarks, service marks and logos used in this report are trademarks or service marks of Saturna.

The information in this report was obtained from sources Saturna believes to be reliable and Saturna believes the information and opinions in the material are accurate and complete as of the date of this material. However, information and opinions contained herein will change over time and without notice. Saturna has no obligation to update or amend any information or opinions at any time. Saturna makes no representations as to the accuracy or completeness of this material, nor does it have any responsibility to ensure that any other materials, including any containing materially different information, are brought to the attention of any recipient of this report.

Under no circumstances shall Saturna, its employees, or any affiliate, be responsible for any investment decision by any recipient. This material is distributed on condition that it will not form the sole basis for any investment decision by any recipient. Any recipient who is not a market professional or institutional investor should seek the advice of an independent financial advisor prior to taking any investment based on this report or for any necessary explanation of its contents.

Saturna does not provide tax, legal or accounting advice. Investors should consult their own tax, legal and accounting advisers before engaging in any transaction. In compliance with IRS requirements, recipients are notified that any discussion of U.S. federal tax issues contained or referred to herein is not intended or written to be used for the purpose of (A) avoiding penalties that may be imposed under the Internal Revenue Code; nor (B) promoting, marketing or recommending to another party any transaction or matter discussed herein.

Past performance does not imply or guarantee future performance, and no representation or warranty, express or implied is made regarding future performance. The price, and value of, and income from, any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of foreign securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADRs — the values of which are influenced by currency volatility — effectively assume this risk.

Please consider an investment's objectives, risks, charges, and expenses carefully before investing. To obtain this and other important information about the Amana, Sextant and Idaho funds in a current prospectus or summary prospectus, please visit www.saturna.com or call toll free 1-800/SATURNA. Please read the prospectus or summary prospectus carefully before investing.

The Amana, Sextant and Idaho Tax-Exempt Funds are distributed by Saturna Brokerage Services, member FINRA / SIPC. Saturna Brokerage Services is a wholly-owned subsidiary of Saturna Capital Corporation, adviser to the Amana, Sextant and Idaho Tax-Exempt Funds.

© Saturna Capital


Read more commentaries by Saturna Capital