Matthew PeronChief Investment Officer, Senior Managing Director | 2018

Emerging Markets Equity Positioning

Using the top 10 country constituents of the MSCI EM Index, our approach is represented by our multifactor 4-Ps framework.

THE FOUR Ps:
POLICIES, POPULATION, POTENTIAL PROFITABILITY

Investors tend to lump emerging markets together, sometimes failing to recognize fundamental differences between countries and regions. Using the top 10 country constituents of the MSCI EM Index, our approach is represented by our multifactor 4Ps framework. We have reviewed the data and ranked each country versus this cohort, adding together the relative positioning to arrive at a total unweighted score. In our approach, the lower the score is the better the rank.

For each factor, our conclusion is that when considering the EM asset class, Asian economies offer investors the best opportunity in terms of the economic and profit growth that ultimately drives stock returns.

Our final scores:

See sources at the bottom of the webpage.

POLICIES
Monetary, regulatory, trade-related—the ease of creating and sustaining economic growth, infrastructure investment


As it relates to policy, we include eight factors. We have examined the effectiveness a government provides to its country via the World Bank’s Governance Indicators, as well as the degree of support an economy receives from its monetary and fiscal authorities. We also assess real GDP growth over a 10-year period, government spending and debt levels as a percentage of GDP, as well as a country’s position in the global economy as indicated by its current account balance and debt held by foreigners.

When pursuing investments on a global basis, it is vitally important to consider the manner in which countries are organized and run. The World Bank has an index based on its worldwide governance indicators, which include political stability, rule of law, and regulatory quality, among others.

Other important measures we have included in the policy framework are the Economic Freedom Index produced by the Heritage Foundation and the Ease of Doing Business Index created by the World Bank. These indices generally reflect favorable regulations for business and stronger protections of property rights, foundations for strong economic framework and growth.

See sources at the bottom of the webpage.

POPULATION
The demographic profile that is the foundational building block for economic growth


We use six components in this factor. Total population growth is often a leading indicator for growth in the working age population. This is important because there is a high correlation between growth in individuals in the 20-65 age group and the demand from this cohort for goods and services as individuals marry, raise children, and buy and furnish a home, all of which help to drive economic growth.

Another important demographic component is the percentage of the population that is over 65. Wage growth declines in this age bracket while the need for health care and other services increases and must be supported by the rest of the population, which constrains the ability of an economy to grow.

Crucial in evaluating a country’s population and its impact on the economy is how productive the workforce is. It is also vital to assess the savings rate of a country, as that has an influence not only on the willingness to spend, which benefits economic activity, but also the ability to fund overall debt levels from internal sources.

See sources at the bottom of the webpage.

POTENTIAL
Assess the relative and absolute drivers of innovation


The potential for innovation in industries of high intellectual property within a country is important, as these industries tend to have higher growth, have higher profitability, and provide higher wages to their employees. To evaluate this, we look at a number of variables. One is Cornell University’s Global Innovation Index, which includes items such as venture capital deals, online creativity, R&D, patents and knowledge creation.

All innovation does not come from government policy and spending. A country’s venture capital community and technology-focused universities, combined with the creative spirit of innovation, are also important factors. We also include the Ease of Doing Business Index developed by the World Bank as a measure to determine the ability of great ideas to be translated into business success.

See sources at the bottom of the webpage.

PROFITABILITY
The ability to convert growth into shareholder returns by assessing the divergence of GDP and corporate growth among regions


An important consideration is the overall profitability of companies that are available to investors. We utilize the DuPont model, which evaluates the financial performance of companies on measures such as Asset Turnover, Pretax Margins, Debt Levels, and ultimately, Return on Equity. For this measure we use recent returns as well as long-term averages. Asset turnover is a ratio of a company’s sales to assets. Pretax margins are a proxy for how much money a company makes per dollar of sales, before taxes. We also include in our profitability discussion the outlook for sales growth and earnings over the next 12 months.

See sources at the bottom of the webpage.


CONTINUE READING

Sources and Disclosures

Sources for 4P Data

BCA Research

Bloomberg

Bureau of Labor and Statistics

CEIC Data

CIA World Factbook

Cornell University

FactSet

Global Innovation Index

Goldman Sachs

Heritage Foundation

Insead

International Monetary Fund

Ned Davis Research

OECD

SC Johnson College of Business

St. Louis Federal Reserve

tradingeconomics.com

WIPO

World Bank



Important Disclosures

City National Bank provides investment management services through its wholly owned subsidiary City National Rochdale, LLC, a registered investment advisor.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and, although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Returns include the reinvestment of interest and dividends. Investing involves risk, including the loss of principal. Diversification may not protect against market loss or risk.

Past performance is no guarantee of future performance.

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who’s interested in adding an experienced investment manager to your financial team, learn more about working with us here.