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The Good, Bad, And Ugly Of Emerging Markets

Tyler Durden's picture





 

With Europe now seemingly in exile from even the bravest knife-catcher value-manager, and, despite media protestation, US equities facing weak macro data and a fiscal cliff of epic proportions; it is no surprise that everyone and their mom thinks emerging markets are the place to be. However, as UBS notes today, not all EM balance sheets (whether government, corporate, or private) are the same and they break down the low, medium, and high risk balance sheets across Asia, LatAm, and EMEA.

 

UBS - Where are EM balance sheets at risk?

Looking at Global Emerging Market (GEM) balance sheets from three angles, government, companies and consumers, we find that in aggregate they look very healthy. Whether we look at public debt, net debt or external debt to GDP, indebtedness of emerging market governments is a lot less than in the developed world. Emerging market government debt has fallen over the past few years, in stark contrast to the rise in public debt we have seen in the West.

 

 

A similar pattern is visible at the corporate level. GEM Inc’s balance sheet looks very strong across all the Emerging Markets. A decade of bumper profits has led to a large increase in shareholders’ equity while the financial crisis left GEM CFOs reluctant to assume more debt, despite low yields. The result is a record low net debt to equity ratio of 20%.

It is in private credit where we have seen an increase in indebtedness in the emerging markets. Private credit growth averaged 12% per annum between 2001 and 2011 as private credit as a percentage of GDP increased from 80% to 100%. We believe this credit boom for the most part has supported not undermined growth.

However, aggregate figures hide country-by-country balance sheet strengths and weaknesses. Below we take the emerging market universe and assign a low, medium or high risk rating to each of their government, corporate and private debt characteristics, combining them into an overall balance sheet risk score.

 

 

  • Low risk. In sum, Indonesia, Malaysia, Philippines, Peru and Russia appear best positioned. Strong balance sheets that support sustainable growth are rewarded by investors by relatively high multiples, in all cases except Russia, where concerns over corporate governance weigh heavily.
  • Medium risk. China, South Korea, Taiwan, Thailand, Chile, Colombia, Mexico, Czech Republic, Egypt, Hungary, Poland and South Africa are all medium risk. They display either one area of remarkable weakness, such as consumer credit in Korea and high government indebtedness in EMEA, or are just average in all categories, like Czech Republic.
  • High risk. Those countries with have the highest balance sheet risks are Brazil, India, Morocco and Turkey. In the case of Brazil and Turkey, the risk is reflected in cheap valuations.

As is evident in Europe, high debt levels are detrimental to economic growth and equity returns. Solid government accounts generally reward policymakers in such markets with valuable policy flexibility, while healthy consumer balance sheets allow credit growth to be a strong domestic growth driver. In a slow and uncertain global growth environment, pillars to support growth are crucial and are market differentiators - especially if global contagion spreads as we suspect.

 


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Wed, 05/30/2012 - 15:02 | Link to Comment Cult_of_Reason
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It's All Bush's Fault
http://t.co/jDOrDOLv

Wed, 05/30/2012 - 15:03 | Link to Comment Careless Whisper
Careless Whisper's picture

The Careless Whisper HIDDEN IN PLAIN VIEW NEWS Update & Threadjacking

 

Mexicans Firebomb 5 PepsiCo Facilities In Retaliation For Delivery Drivers Spying, Pepsi Denies

http://www.centredaily.com/2012/05/28/3210398/mexico-suspects-cartel-in-pepsi.html

FLASHBACK IN THE USA; Broward Sheriff Offers $100 To Landscapers & Garbage Men For Spying

http://tinyurl.com/73po2cd

Hewlett-Packard Named In Criminal Probe For Alleged Extortion Of NYC

http://www.nydailynews.com/news/columnists?columnist=2.1027

Poland Outlaws Monsanto Genetically Modified Corn

http://tinyurl.com/867d4sk

Retaliation? "Nazi Death Camps" Now Called "Polish Death Camps" At WH Ceremony

http://www.mercurynews.com/nation-world/ci_20741487/poles-outraged-over-obama-reference-polish-death-camp

CBS News Anchors & Reporters Refuse To Speak The Name Of Teen Hero Honored For Saving Life; VIDEO

http://miami.cbslocal.com/video/7344186-broward-school-board-honors-teen-hero/

S&P: IBM Credit Rating Better Than Japan

http://www.bloomberg.com/news/2012-05-30/ibm-credit-rating-boosted-as-company-shifts-to-software.html?cmpid=yhoo

 

 

 

 

Wed, 05/30/2012 - 15:08 | Link to Comment redpill
redpill's picture

Just wait for the World Cup in Rio, it's going to be an epic clusterfuck, guaranteed.

Wed, 05/30/2012 - 15:45 | Link to Comment falak pema
falak pema's picture

and Brazil will not win; epic tragedy in the making.

Wed, 05/30/2012 - 16:06 | Link to Comment redpill
redpill's picture

And then the rioting fun begins!

Wed, 05/30/2012 - 17:37 | Link to Comment HUGE_Gamma
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Fortunately the World Cup gets diluted throughout Brazil.. The Olympics in one city will be intereting.

Athens did it in 2000 and Greece is a real sh*thole

Wed, 05/30/2012 - 15:04 | Link to Comment bigdumbnugly
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tyler you coulda had a twofer and used the largard pic here too.

Wed, 05/30/2012 - 15:10 | Link to Comment falak pema
falak pema's picture

as the Oligarchy mayhem spreads to all continents the knife throwers ask themselves : whom can we nail to the cross next; ah, the smell of fresh blood in the morning. Whom the Gods wish to destroy they first drive mad through  greed and hubris. 

Wed, 05/30/2012 - 15:15 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

Union bank of Swiss sharts out another gem. The entire 'risk model' is nothing more than a where-we-are-no-longer-welcome laundry list that just keeps mushrooming.

Wed, 05/30/2012 - 15:20 | Link to Comment falak pema
falak pema's picture

a bank without a home that encourages the people to leave their homes in order to maximise 'wealth' in shangrila. Shangrila will be third world artificial haven where you will have to drink local blood like Dracula to save your hoard. Nice forward planning, being a Nazi in new shangrla land when your home land is desolation. Not for me. 

Wed, 05/30/2012 - 15:37 | Link to Comment slewie the pi-rat
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Bronco Billy

clint throwing knives at sandraLocke

keep drinking, everybody!

bong-ho!

Wed, 05/30/2012 - 15:09 | Link to Comment xtop23
xtop23's picture

Honestly, I don't see the point in investing at all anymore.

Why not just buy some metal and ride out this idiocy?

Wed, 05/30/2012 - 15:12 | Link to Comment Dick Darlington
Dick Darlington's picture

Wonder what Poland would look like without the massive amounts of EU funds poured into the country... Greece used to be the biggest net recipient of EU funds but Poland took the 1st place a few years ago. Just saying...

Wed, 05/30/2012 - 15:42 | Link to Comment Careless Whisper
Careless Whisper's picture

Poland kept their own currency. It's called the Zloty.

Wed, 05/30/2012 - 15:20 | Link to Comment q99x2
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You'll get better mileage if you replace your pillar differentiator.

 


Wed, 05/30/2012 - 16:52 | Link to Comment bank guy in Brussels
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Interesting ... Indonesia the most favourable emerging market investment locale in the world, according to this chart.

Wed, 05/30/2012 - 18:19 | Link to Comment BluePill
BluePill's picture

India is a fucking hyped up shit hole full of corrupt people and scum parasitic leeches, they are scum in this world

 

Indians are parasites they will destroy the entire world economy

Wed, 05/30/2012 - 18:55 | Link to Comment Poofter Priest
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Uhhh sorry,

Us white guys beat them to it.

Wed, 05/30/2012 - 18:55 | Link to Comment CreativeDestructor
CreativeDestructor's picture

Medium Risk China? this paper isn't good even for toilet paper. Corrupt UBS. F U!

Ok so greece, spain, et al lied on their debt levels and EMs don't? EM invented fudging and lying game you UBS fuckwits!

Oh and all these emergin'markets will export to who? Mars? oh Pluto? Great! Watch their debt levels deteriorate faster than you can fuckin'spell it.

Wed, 05/30/2012 - 20:01 | Link to Comment OC Money Man
OC Money Man's picture

Emerging markets are wildly sensative to currency changes.  Europe is China and most other EM biggest marketplace.  China and most Asians pegs to the U.S. dollar.  A decline in the euro is destroying EM competitiveness with their biggest customer.  Commodity prices are collapsing because EMs competitiveness is evaporating. 

Wed, 05/30/2012 - 21:44 | Link to Comment Jack Kreuz
Jack Kreuz's picture

Chinese government balance sheet risk: HIGH

Thu, 05/31/2012 - 02:18 | Link to Comment HungrySeagull
HungrySeagull's picture

all the knife catchers have butchered themselves.

now hiring sword swallowers.

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