Milltrust Alert – Selected Insights from the Emerging Markets

Key Story

The Road Ahead for EM
by Eric Anderson, Senior Portfolio Manager
October was the worst month for global equity markets since May 2012 and the worst month for global Emerging Markets since May 2015.  Risk-off mood dominated Emerging Markets triggered by declines in U.S. equities, amid various uncertainties including U.S.-China trade frictions.

Where does that leave us today:

• EM equity valuations are now back to the same levels as January 2016 before the start of the huge US$ 8 trillion upswing in the asset class.
• Earnings expectations of Emerging Market companies have increased nearly 40%since early 2016, so investors can buy EM stocks today at the same price multiple but for much higher profitability.
• When looking at the price to book ratio, EM equities are now trading at an over 35% discountto their developed world counterparts, one of the biggest differences in the last 10 years.  Industry experts have pointed out that since 2001, when the discount has been this wide, EM stocks have typically outperformed developed market equities over the next 5 years.

Key Soundbites

• US: The US Fed remains on course to a ‘gradual tightening’, thanks to sustained strong economic growth and falling unemployment rate. The economic risks remain roughly balanced.
• OIL: US oil falls below $60 as US bear market deepens and The US, Russia and Saudi Arabia pump at or near record highs, producing more than 33 million barrels per day (bpd), a third of the world’s oil.
• CHINA: 22 percent of China’s urban housing stock is unoccupied which adds up to more than 50 million empty homes.
• BRAZIL: Can This Finance Star Pull Brazil’s Economy Out of the Dumps? New “superminister” Guedes has said his priorities are to sell off dozens of state companies, rein in the pension-system deficit, deregulate industries, and cut taxes to attract investment and create jobs.
• INDIA: India’s government is asking the central bank to hand over a part of its surplus reserves and loosen liquidity norms for lenders — demands that are likely to escalate a standoff with the monetary authority that’s fiercely protective of its independence.

Key Investment

Lojas Americanas is a Brazilian  retail chain founded in 1929 in the city of Niterói, Rio de Janeiro. Currently, the company has 1306 stores in all 26 Brazilian states and in the Brasília-area Federal District. The network sells over 80 thousand items of four thousand different companies. In January 2007, Lojas Americanas acquired the Brazilian operations of the network of video rental Blockbuster for R$186.2 million and adapted to store the model Americanas Express.