EMERGING MARKETS • An in-depth look at emerging markets, including recent history and today’s investment landscape • Tips and tools to develop emerging markets portfolios, including identifying portfolio drivers and security analysis • A useful guide for investing in any market condition Foreword by New York Times bestselling author Ken Fisher Fisher Investments on Emerging Markets FISHER INVESTMENTS PRESS Fisher Investments Press brings the research, analysis, and market intelligence of Fisher Investments’ research team, headed by CEO and New York Times best-selling author Ken Fisher, to all investors The Press covers a range of investing and market-related topics for a wide audience—from novices to enthusiasts to professionals Books by Ken Fisher How to Smell a Rat The Ten Roads to Riches The Only Three Questions That Count 100 Minds That Made the Market The Wall Street Waltz Super Stocks Fisher Investments Series Own the World by Aaron Anderson 20/20 Money by Michael Hanson Fisher Investments On Series Fisher Investments on Energy Fisher Investments on Materials Fisher Investments on Consumer Staples Fisher Investments on Industrials Fisher Investments on Emerging Markets Fisher Investments on Emerging Markets Fisher Investments with Austin B Fraser John Wiley & Sons, Inc Copyright © 2010 by Fisher Investments All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Important Disclaimers: This book reflects personal opinions, viewpoints and analyses of the author and should not be regarded as a description of advisory services provided by Fisher Investments or performance returns of any Fisher Investments client Fisher Investments manages its clients’ accounts using a variety of investment techniques and strategies not necessarily discussed in this book Nothing in this book constitutes investment advice or any recommendation with respect to a particular country, sector, industry, security or portfolio of securities All information is impersonal and not tailored to the circumstances or investment needs of any specific person Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Fisher Investments on emerging markets / Fisher Investments, with Austin B Fraser p cm Includes bibliographical references and index ISBN 978-0-470-45236-3 (cloth) Investment analysis Investments, Foreign Securities Portfolio management I Fraser, Austin B II Fisher Investments HG4529.F58 2010 332.67’3—dc22 2009031921 Printed in the United States of America 10 Contents Foreword ix Preface xi Acknowledgments xv Part I Going Backward to Move Forward Chapter The Five Ws of Emerging Markets Who or What? Where? When? The Most Important Question—Why? 12 But How? 13 Chapter Lions, Tigers, and Dragons, Oh My! 15 Roar of the Tigers 16 To the Brink of Extinction—The Asian Financial Crisis 22 Crisis Causes 26 Lessons and Legacies 33 The Dragon Unleashed 36 The History of China’s Stock Market—A Lesson in Supply and Demand 39 v vi Contents Chapter Latin America and the Vagaries of Boom and Bust 47 The Political Economy of Latin America 48 Till Debt Do Us Part—The 1982 Crisis 53 The Tequila Crisis 67 Chapter From the Rubble of the Iron Curtain to the Legacy of Apartheid 77 The Rubble of the Iron Curtain 78 The Wild, Wild East 81 Crisis Strikes Again—The 1998 Ruble Crisis 88 Putin and the Modern Soviet State 91 The Legacy of Apartheid—Race and Markets 96 Part II Developing an Emerging Markets Strategy 107 Chapter From the Past to Today—How to Approach Emerging Markets 109 Prelude to a Portfolio: Choosing a Benchmark 110 Getting Started: Emerging Markets Today 114 The Best Way to Think about Emerging Markets 120 Putting It Together: The Top-Down Method 122 Top-Down Deconstructed 126 Examples of Quantitative Factor Screenings 127 Chapter Developing Portfolio Drivers 131 The Importance of Portfolio Drivers in Emerging Markets 131 The Proper Perspective 134 Identifying Portfolio Drivers 136 Translating Drivers Into Portfolio Allocation Decisions 145 Contents vii An Illustration in Analyzing Portfolio Drivers—Brazil During the 2003–2007 Bull Market 146 What Can Drive Emerging Markets as a Category 154 Getting Information to Develop Drivers 160 Chapter Security Analysis 165 Make Your Selection 166 A Five-Step Process 167 Other Important Questions to Ask 175 Chapter Putting It Together 181 Two Initial Considerations 181 Instruments for Investing in Emerging Markets 183 Common Challenges and Risks 193 The Future—Frontier Markets 198 Notes 201 About the Author 213 Index 215 Notes 10 11 12 13 14 15 16 211 used to create any financial instruments or products or any indices The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages Ibid Bogle Financial Markets Research Center, “About John C Bogle,” Vanguard (May 2006), http://www.vanguard.com/bogle_site/bogle_bio.html (accessed April 28, 2009) ProFunds website, www.profunds.com Bloomberg Financial, L.P as of 4/21/09 Ibid Securities and Exchange Board of India, “Securities and Exchange Board of India (Foreign Institutional Investors) Regulations,” (November 1995, amended October 30, 2008), http://www.sebi.gov.in/Index.jsp?contentDisp= SubSection&sec_id=5&sub_sec_id=5 (accessed April 28, 2009) Ibid See note 6, as of 4/22/09 Bloomberg Finance L.P Peter Drysdale, Reform and Recovery in East Asia: The Role of the State and Economic Enterprise (Routledge, 2000), 174 Treasury Malaysia Ministry of Finance, “Statement on the Repatriation of Portfolio Capital,” (February 4, 1999), http://www2.treasury.gov.my/index php?option=com_content & view=article & id=812%3Akenyataan - oleh - yb -menteri-kewangan-i-tun-dato-daim-bin-zainuddin-mengenai-repatriasi-modal-por tfolio&catid=53%3Aucapan&Itemid=251&lang=en (accessed April 28, 2009) See note Ibid Thomson Datastream; See note About the Author Austin B Fraser is a research analyst at Fisher Investments with a focus on emerging markets and macroeconomic strategy Prior to joining the firm, he worked at Cambridge Associates in Washington, DC, as a research associate He graduated from the University of Michigan, Ann Arbor with a BA in history and writes a regular column for MarketMinder.com entitled “Reality Check.” Originally from Detroit, Michigan, he now resides in San Francisco 213 Index 10-K filing, 170 20-F filing, 170 Active investors, 182–183 Affirmative action See Black Economic Empowerment (BEE) Africa See South Africa African National Congress (ANC), 99, 100 Afrikaner National Party, 97–98 Agriculture, 5, 48 AH Premium Index, 44 Allocation decisions: mutual funds and, 189–192 passive vs active investors and, 183 portfolios and, 145–146 top-down approach and, 125–126 Alzheimer’s disease, 53 American Depositary Receipt (ADRs), 185 availability of securities and, 160 explained, institutional vs retail investors, 182 liquidity and, 195 types of, 185–186 American Express, 12–13 Anderson, Aaron, 113 Anglo Platinum, 104 Apartheid See South Africa, apartheid in Argentina: borrowing after Tequila Crisis, 73 coverage by index provider, dollar trading volume, 194 Latin American financial crisis and, 63 market accessibility and, 196 MSCI weight, 114 performance as emerging market, 132 sector weights, 116, 123 T Rowe Price fund weights, 190 Asia, East: crisis recovery vs Latin America, 63–64 emerging markets in, 118 ETFs and, 188 export-driven growth, 20–21 high savings and investment, 18–20 history of, financial, 15–16 liberalization, financial, 22 macroeconomic stability, 17–18 Asian Financial Crisis of 1997 to 1998, 11, 15 causes of, 26–33 comparison to Tequila Crisis, 74 IMF loan packages, 24 lessons from, 33–36 repatriation difficulties, 198 Russian Ruble Crisis and, 89 timeline, 22–26 Australia: as a developed market, inflation targeting and, 147 Authoritarianism, 6, 52 Bahrain, 190 Baht, 22–24 Baikalfinansgrup, 94 Baker, James A., 61 Baker Plan, 61 Balance of payments data, 28 Banco de Mexico, 161 Bank of International Settlements, 60 Bank of New York, 184 Emerging Markets 50 ADR Index, 192 Bank Pekao, 194 215 216 Index Banks See Borrowing, international; Lending, government-directed; and specific banks Bantu Authorities Act, 98 Bantu Education Act, 98 Barclays (iShares), 186, 187 Baum, Lyman Frank, 48 Benchmark, choosing a, 110–114 Berlin Wall, dismantling of, 80 Beta coefficient, 157 Bias, home, 10, 12 Bid-ask spread, 195 Black Economic Empowerment (BEE), 102–105, 143 Bloomberg.com, 162 Boer Wars, 96, 97 Bogle, John, 192 Bolsa Mexicana de Valores (BMV), 73 Bolshevik Revolution, 78 Borrowing, international, Asian Financial Crisis and, 29–30 Brady, Nicholas, 62 Brady Bonds, 62 Brady Plan, 62 loss of confidence in, 72 Tequila Crisis and, 69–70 Brazil: Asian Financial Crisis and, 25 average annual economic growth, coverage by index provider, debt, 54 dollar trading volume, 194 MSCI weight, 114 mutual funds and, 189 performance as emerging market, 132 populism in, 49 following financial crisis, 64–67 portfolio drivers in 2003-2007, 146–153 sector weights, 116, 123 T Rowe Price fund weights, 190 Bretton Woods system, 100 Brezhnev, Leonid, 78 BRIC See Brazil; Russia; India; China British Broadcasting Company (BBC), 162 British Petroleum, 86 Broad-Based Black Economic Empowerment (B-BBEE), 102 Business drivers, 167–168 Business Week, 162 Calvinism, 97 Canada: dollar trading volume, 194 inflation targeting and, 147 Latin American bank default, 60 Capital account records, 28 Capital barriers: Asian, 19 as a portfolio driver, 141 Capital Group, 10 Capitalism: adherence to principles of, China and, 37 Latin America and, 47 Cardoso, Fernando, 146–148 Carter, Jimmy, 59 Certainties, lack of investment, 13 Chaebol system, 31 Charles Schwab & Co., 184 Chernobyl nuclear power plant, 79 Chiapas region, 71, 75 Chile: coverage by index provider, dollar trading volume, 194 MSCI weight, 114 sector weights, 116, 123 T Rowe Price fund weights, 190 China Daily, 162 China: Asian Financial Crisis and, 26 average annual economic growth, benchmarks and, 112 capital markets history, 16 coverage by index provider, defining emerging markets in, dollar trading volume, 194 economic development, 5, 155 history of, financial, 36–39 demand, 40–41, 42 government controls, 42, 45 lessons, 45–46 market returns, 39–40 shares, 41–45 supply, 40–41, 42 liquidity and, 193 massive currency reserve, 35–36 MSCI weight, 114 performance as emerging market, 132 restrictions on foreign investors in, sector weights, 116, 123 T Rowe Price fund weights, 190 vital to portfolio performance, 121 Chromium, 99 Class divisions, Latin American, 49, 71 Coking coal, 95 Cold War, 54–55 Collor de Mello, Fernando, 66–67 Index Colombia: coverage by index provider, MSCI weight, 114 performance as emerging market, 132 sector weights, 116, 123 T Rowe Price fund weights, 190 Colosio, Luis, 71, 75 Commingled assets, 188 Communism, 36, 52 Communist Party of China (CPC), 36 Congress of People’s Deputies (CPD), 80 Congress of South African Trade Unions (COSATU), 101 Consensus, 135 analyzing expectations, 173–175 Consumer Discretionary: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 T Rowe Price fund weights, 191 Consumer price index (CPI), as a portfolio driver, 137 Consumer Staples: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Consumerism, age of, 54 Contagion, 158 Asian Financial Crisis and, 25, 34 Tequila Crisis and, 74 Contrarianism, 135 Corruption, as a portfolio driver, 142 Cost structure, 177 Croatia, 199 Cruzado Plan, 65 Cuba, US embargo on, 55 Currency: Asian Financial Crisis and crisis, 34 reserve and, 35–36 strength as a portfolio driver, 138 Current account, 28 Custody issues, 185 Cyprus, 190 Czech Republic: coverage by index provider, MSCI weight, 114 sector weights, 116, 123 T Rowe Price fund weights, 190 217 Daewoo Group, 31 de la Madrid, Miguel, 68–69 Debt: good vs bad, 34–35 levels as a portfolio driver, 139 postponing, 61 service burden, 58 Decentralization, Russian and, 83 Deflation, 52 See also Inflation Democracy, 6, 52 Department of Statistics Malaysia, 161 Depositary receipts (DRs), 184–186 Depression, gold standard and, 100 Deutsche Bank, 184 Devaluation, 21, 22–25 Diamonds, 97 Disasters, national, 23 Dividend yield, 174 Dow Jones Industrial Average, 25 Drivers See Business drivers; Earnings drivers; Portfolio drivers E*Trade Securities, 184 Earnings drivers, 167–168 East Asia Miracle See Asia, East Economist, 162 Economy, vs market, 45 Egypt: coverage by index provider, MSCI weight, 114 performance as emerging market, 132 sector weights, 116, 123 T Rowe Price fund weights, 190 Embargo, 55 Emergencies, national, 23 Emerging markets: benchmarks for, 113–114 characteristics of, 5–7 defined, 4–5 demystification of, 3–4 development of, 9–12 locations of, 7–9 rationale for, 12–13 Energy: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Eurobond, 88 Eurodollar market, 55–56 218 Index Europe: inflation, 18 Latin American bank default, 60 EV/EBITDA, 174 Exchange rate policy: convertibility, 69 East Asian, 18 fixed, 20–21 Latin American, 18 Russian Ruble Crisis and, 90 Exchange-traded funds (ETFs), 186–188 availability of securities and, 160 institutional vs retail investors, 182 quantitative factor screenings, 129 Expense ration, 188 Export-driven growth models, 20–21 Fear, emerging markets and, 3, 12 Federal Security Service (FSB), 91 Financials: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Financial Times, 162 Fiscal policy, as a portfolio driver, 141 Fiscal Responsibility Law, 147 Fisher, Ken, 60 Fixed exchange rates See Exchange rate policy, fixed Floated shares, 41 Forced savings programs, 19 Forecasts, investor, 145 Foreign direct investment (FDI), 144 Foreign exchange: freedom of, reserves, 23 Foreign Institutional Investor (FII), 196 Foreign investment: as a portfolio driver, 144 restrictions on, Franklin Templeton Investments, 10 Friedman, Milton, 51 Frontier markets, 191, 198–200 Frontier Markets Index, 198 FTSE, emerging market country coverage, 8, Fund repatriation, Gaige kaifang, 36, 37 Gazprom, 86 GDP growth, as a portfolio driver, 136–137 General Agreement on Tariffs and Trade (GATT), 68 General Electric (GE), 194 Germany: average annual economic growth, inflation and, 51 Gini coefficient, 49 GKOs, 88–89 Glasnost, 79–81 Global Depositary Receipts (GDRs), 185 Global Industry Classification System (GICS), 115 Global Investors Emerging Markets Funds (GEMFX), 189 Gold, 97, 99 standard, 100 Goldman Sachs, 11 Gorbachev, Mikhail, 78–81 Government stability, as a portfolio driver, 140–141 Hang Seng Indexes, 44 Health Care: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Hedging, 30 Hee, Park Chung, 31 Heritage Foundation, 143 Hong Kong: economic growth, 16 pegged currency, 21 restrictions on foreign investors and, T Rowe Price fund weights, 190 tax policies, 19 How to Smell a Rat: The Five Signs of Financial Fraud, 60 Hungary: coverage by index provider, MSCI weight, 114 sector weights, 116, 123 T Rowe Price fund weights, 190 Hyperinflation See Inflation, hyperIncome, low levels of per capita, Index of Economic Freedom, 143 Index fund, 192 India: ADRs traded on US exchanges, 197 Asian Financial Crisis and, 25, 26 average annual economic growth, coverage by index provider, dollar trading volume, 194 market accessibility, 196, 197 Index MSCI weight, 114 sector weights, 116, 13 T Rowe Price fund weights, 190 Indonesia: Asian Financial Crisis and, 23, 26 average annual economic growth, balanced budget law, 17 coverage by index provider, defining emerging markets in, dollar trading volume, 194 economic growth, 16 exchange rates, 21 IMF role in Asian Financial Crisis, 32 MSCI weight, 114 per capita income, performance as emerging market, 132 rapid policy adjustments, 18 sector weights, 116, 123 T Rowe Price fund weights, 190 Industrials: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Inequality: Latin American, 49 South African labor, 101 Inflation: Asia and, 17–18 in Brazil, 64–65, 147, 149–150 hyperinflation, 51, 83, 88, 147 Latin American financial crisis and, 50–52 as a portfolio driver, 137 Russian Ruble Crisis and, 90 targeting, 147 Information Technology: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Infrastructure: securities analysis and, 177 spending as a portfolio driver, 140 Initial public offering (IPO): portfolio drivers, 134 Russian Ruble Crisis and, 94 supply and demand, 40–41 Institutional investors, 181–182 Institutions See specific type Intellectualism, anti-, 78 219 Interest rates: Asia and artificially low, 19 in Brazil, 149–150 as a portfolio driver, 137 Russian Ruble Crisis and, 88–89 securities analysis and, 179 International Finance Corporation (IFC), Emerging Markets Index, 11 International Monetary Fund (IMF): Asian Financial Crisis and, 24, 32–33 Brazil refuses support from, 65 gold standard and, 100 Russian Ruble Crisis and, 89 World Economic Outlook Database, 161–162 Iranian Revolution, 55 Iron ore, 150 iShares MSCI All-Country World Index (ACWI), 187 Israel: coverage by index provider, MSCI weight, 114 oil prices in, 55 performance as emerging market, 132 sector weights, 116, 123 T Rowe Price fund weights, 190 Issuance, as a portfolio driver, 139–140 Jakarta, 25 Japan: ADRs and, Asian Financial Crisis and, 25 average annual economic growth, as a developed market, dollar trading volume, 194 as an early emerging market, economic growth, 16 restricted capital flows, 19 Jawboning, 138 Johannesburg Stock Exchange, 101 Jordan, 199 JP Morgan: DRs and, 184, 186 renaming Third World Equity Fund, Judicial institutions, underdeveloped, Kansas, 48 Kazakhstan, 199 Kenya, 199 KGB, 80, 91 Khodorkovsky, Mikhail, 86, 92–94 Korea, South: Asian Financial Crisis and, 23–24, 26, 32, 33 average annual economic growth, coverage by index provider, 220 Index Korea, South (continued) dollar trading volume, 194 economic growth, 16 exchange rates, 21 government-directed lending, 31–32 IMF and, 32, 33 MSCI weight, 114 mutual funds and, 189 performance as emerging market, 132 restricted capital flows, 19 Samsung Electronics and, 13 sector weights, 116, 123 T Rowe Price fund weights, 190 vital to portfolio performance, 121 Kraft Foods, 13 Kuwait, 199 Latin America: 1982 crisis, 53–54 debt, 57–58 economic consequences of, 63–64 Eurodollar market, 54–55, 56–57 ineffectiveness of austerity measures, 60–62 loan default, 58–60 oil prices, 55–56 populism in Brazil following, 64–67 emerging markets in, 118, 119–120 ETFs and, 188 exchange rate policy, 18 inflationary excess money, 17 political economy of, 47–53 See also Mexico, Tequila Crisis Lebanon, 199 Legal institutions, underdeveloped, Legislative risks, securities analysis and, 178 Lending, government-directed, 31–32 Leveraged funds, 192–193 Liberalism, 68 Liquidity: inflation and, 51 Latin American financial crisis and, 61 See also Risks, liquidity Lithuania, 80 Load, 189 Loans-for-share scheme, 85–88 London Interbank Offering Rate (LIBOR), 58, 59 Lukoil, 86 Macro overview, top-down approach and, 125 Mail & Guardian, 162 Malaysia: Asian Financial Crisis and, 23, 26, 33 coverage by index provider, dollar trading volume, 194 economic growth, 16 government sources, 161 mandatory pension plans, 19 MSCI weight, 114 mutual funds and, 189 performance as emerging market, 132 refuses IMF assistance, 33 repatriation difficulties, 198 sector weights, 116, 123 T Rowe Price fund weights, 190 Manganese, 99 Mania, Asian Financial Crisis and, 26–29 Market depth, 195 Marshall Plan, 54 Materials: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 150–151, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Maturity transformation, 29 Mbeki, Thabo, 102 Mechel, 95–96 Media coverage, as a portfolio driver, 144 Menatep, 85, 92–93 Mergers & Acquisitions (M&A), as a portfolio driver, 139 Mexico: average annual economic growth, balance of payments data, 28 Brady Plan, 62 coverage by index provider, dollar trading volume, 194 ETFs and, 183 government sources, 161 loan default, 53–54, 59–60 MSCI weight, 114 mutual funds and, 189 per capita income, performance as emerging market, 132 sector weights, 117, 123 Tequila Crisis, 67 bank lending, 69–71 contagion, 74–75 credit crisis, 75 devaluing of the peso, 71–73 free market reform, 67–69 implications, 74 politics in, importance of, 75 T Rowe Price fund weights, 190 Middle East, inflation, 18 Middle East & Africa (EMEA), emerging markets in, 118, 119 MMM fund, 82–83 Index Mobius, Mark, 10 Momentum cycle, as a portfolio driver, 145 Monetary policy, as a portfolio driver, 137 Morgan Stanley Capital International (MSCI), 8, 9, 16, 17 All-Country World Index (ACWI) varying roles of benchmarks, 113 popularity of, 12 Emerging Asia, Asian Financial Crisis and, 25 Emerging Market Index, 198, 199 for portfolio construction, 111, 112 Frontier Market Index, 198, 199 GICS and, 115 World Index, 198, 199 Asian Financial Crisis and, 25 country weights, 114 varying roles of benchmarks, 113 Morocco: coverage by index provider, MSCI weight, 114 performance as emerging market, 132 T Rowe Price fund weights, 190 sector weights, 117, 123 Moscow University, 78 Mutual funds, 188 allocation decisions, 189–192 fees, 188–189 index funds, 192 leveraged funds, 192–193 as a portfolio driver, 144 Nationalism, in South Africa, 97 Net interest margin (NIM), 138 Netherlands, 26–27 Neves, Tancredo, 64 New Economy, xi New York Stock Exchange, Nigeria, 199 Nixon, Richard, 100 Norilsk Nickel, 86 North American Free Trade Agreement (NAFTA), 67, 69, 71 Novolipetsk Steel (NLMK), 85 Oil prices, rising, 55–56, 58–60 Oligarchs, Russian rise of, 84–88 Oman, 190, 199 Oneximbank, 84–86 Orange Free State, 97 Ordinary shares, 184 Organisation for Economic Cooperation and Development (OECD), 71 Organization of Petroleum Exporting Countries (OPEC), 55 Orthodox Christianity, 91 Over-the-counter trades, 185 Own the World, 113 P/B (price-to-book), 127, 174 P/CF (price-to-cash-flow), 127, 174 P/E (price-to-earnings), 127, 174 P/FE (price-to-forward earnings), 174 P/S (price-to-sales), 127, 174 Pakistan: Asian Financial Crisis and, 26 coverage by index provider, MSCI weight, 114 performance as emerging market, 132 sector weights, 117, 123 T Rowe Price fund weights, 190 Panic, Asian Financial Crisis and, 26–29 Parliamentary system, 84 in Russia, 83–84 Partido Revolucionario Institucional (PRI), 68 Pass Laws Act, 98 Passive investors, 182–183 Patent law, 53 The Penguin History of Latin America, 49 People’s Republic of China, 36 Perestroika, 79–81 Performance, analyzing fundamental, 170–171 Peru: coverage by index provider, dollar trading volume, 194 Latin American financial crisis and, 63 liquidity and, 193 MSCI weight, 114 performance as emerging market, 132 populism in, 49 sector weights, 117, 123 T Rowe Price fund weights, 190 Tequila Crisis and value of, 70, 71–72 Philippines: Asian Financial Crisis and, 23, 26 coverage by index provider, dollar trading volume, 194 MSCI weight, 114 performance as emerging market, 132 sector weights, 117, 123 T Rowe Price fund weights, 190 Platinum, 99 Poland: 1989 election, 80 average annual economic growth, coverage by index provider, MSCI weight, 114 performance as emerging market, 132 221 222 Index Poland (continued) sector weights, 117, 123 T Rowe Price fund weights, 190 Political models, Political order, Asian Financial Crisis and, 24–25 Political turnover as a portfolio driver, 141 Ponzi, Charles, 60 Ponzi scheme, 59–60, 82 Population Registration Act, 98 Populism, 6, 52 Brazil and, 147–148 Latin America and, 48–50 property rights and, 52–53 US and, 48 Portfolio construction, using benchmarks for, 111 Portfolio drivers: allocation decisions and, 145–146 calculating performance, 112 case study, 146–153 context, 134–136 emerging markets categories, 153–154 country factors, 160 economic growth, 154–156 risk environment, 156–158 securities availability, 159–160 structural differences, 158–159 identifying, 136 economic, 136–140 political, 140–143 sentiment, 143–145 importance of, 131–134 information to develop, 160–163 Postal savings institutions, 19 Potanin, Vladimir, 84–86 Price freezes, 65 Privatization: Latin American financial crisis and, 61 as a portfolio driver, 142 Russia and, 82–83, 85 Production, fast-growing economies and, ProFunds Ultra Emergin Markets Fund (UUPIX), 192 Property rights: Asian, 18 Latin American, 52–53 as a portfolio driver, 141–142 Protectionism, as a portfolio driver, 142 Purchasing power, 75 Putin, Vladimir, 77, 91–96 Qatar, 190, 199 Race See South Africa, apartheid in RAO UES, 86 Raw materials stock exchange (RTSE), 82 RealPlan, 147 Regulatory institutions, underdeveloped, Repurchase activity, as a portfolio driver, 139–140 Retail investors, 181–182 Returns, absolute vs relative, 110 Reuters, 162 Riots: in Brazil, 65–66 See also South Africa, apartheid in Risk, accessibility, market, 195–197 aversion, as a portfolio driver, 144 benchmarks and, 111 closures, unexpected market, 197 environment, 156–158 identifying, 172–173 liquidity, 193–195 repatriation difficulties, 198 top-down approach and controlling, 125 Rosneft, 93, 94 Rostelecom, 86 Russia: Asian Financial Crisis and, 25 average annual economic growth, coverage by index provider, economic history, 77–78 Gorbachev, 78–81 Putin, 91–96 Ruble Crisis of 1998, 11, 88–90 Yeltsin, 81–88 freedom as a portfolio driver and, 143 market closure and, 197 massive currency reserve, 35–36 MSCI weight, 114 performance as emerging market, 132 T Rowe Price fund weights, 190 sector weights, 117, 123 See also Soviet Union Russian Soviet Federative Socialist Republic, 81 Salinas, Carlos, 68–69, 71 Salomon Brothers, Samsung Electronics, 13 chaebol system, 31 Sarney, José, 50, 64–67 SBS-Agro, 85 Scalability, 125 Screenings, quantitative factor, 127–130 Secondary offerings, supply and demand, 40–41 Securities and Exchange Board of India (SEBI), 196 Securities and Exchange Commission (SEC), 185 IDEA database, 170 Securities, availability of, 159–160 Index Security analysis, 165–166 five-step process, 167–175 questions to consider, 175–180 Shanghai Stock Exchange, 39, 40 Sharpeville massacre, 99 Shenzhen Stock Exchange, 39 Sidanco, 86 da Silva, Luiz Inacio Lula, 147–149, 152 Singapore: economic growth, 16 mandatory pension plans, 19 Single-party state, Slovenia, 199 Smolensky, Alexander, 88 Social initiatives, 50 Social stability: Asian Financial Crisis and, 24–25 as a portfolio driver, 143 Socialism, 52 market, 37 South Africa: apartheid in aftermath of, 100–101 history of, 96–100 BEE, 102–105 coverage by index provider, inflation, 18 MSCI weight, 114 sector weights, 117, 123 T Rowe Price fund weights, 190 vital to portfolio performance, 121 South African Breweries (SAB), 101 South Sea Bubble, 27 South Sea Company, 27 Soviet Union: dismantling of, 81–84 distrust of US banks, 54–55 oligarchies, 84–88 reforms under Gorbachev, 78–81 Russia returns of style of, 92–96 See also Russia Soweto massacre, 99 Speculators, 138–139 Standard & Poor’s (S&P): emerging market country coverage, 8, GICS and, 115 Standard Statistics See Standard & Poor’s (S&P) State Duma, 84 State Street Global Advisors (SPDRs), 187 Stock price performance, analyzing, 170–171 Stock selection, enhanced, 125 Stock-specific risks, 172 Strategic attributes, security analysis and, 168–170 Structural reform, as a portfolio driver, 142 223 Subsidies, manipulation of exchange rates, 21 Supply and demand, 40–42 environment, 177 primary influences of currency, 138–139 Surgutneftegaz, 86 Systematic risks, 172–173 T Rowe Price Emerging Market Fund (PRMSX), 189 Taiwan: Asian Financial Crisis and, 25, 26 average annual economic growth, coverage by index provider, dollar trading volume, 194 economic growth, 16 MSCI weight, 114 mutual funds and, 189 restricted capital flows, 19 sector weights, 117, 123 T Rowe Price fund weights, 190 tax policies, 19 Taiwan Semiconductor Manufacturing (TSM), 185 Tariffs, manipulation of exchange rates, 21 Taxes: in Asian, 18–19 Latin American financial crisis and cuts in, 61 manipulation of exchange rates and breaks in, 21 as a portfolio driver, 141 Technocracy, 78 Technology: manias and, 27 securities analysis and, 178 Telecommunication Services: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Tequila Crisis See Mexico, Tequila Crisis Tesobonos, 72 Thailand: Asian Financial Crisis and, 22–24, 26, 27 coverage by index provider, dollar trading volume, 194 economic growth, 16 ETFs and, 186 exchange rate management, 17 IMF role in Asian Financial Crisis, 32 MSCI weight, 114 performance as emerging market, 132 political drivers in, 140 repatriation difficulties, 198 sector weights, 117, 123 T Rowe Price fund weights, 190 224 Index Third World, connotations of, 9–10 Tigers See Asia Time, 15 Top-down method, xi, 122, 124–125 70-20-10, 125–126 deconstructed, 126–127 security analysis and, 166 Totalitarianism, 79–80 Toyota Motor Corporation, Trade barriers: Latin American financial crisis and, 61 as a portfolio driver, 141 Tradeable shares, 41 Transportation, securities analysis and, 177–178 Transvaal, 97 Turkey: average annual economic growth, benchmarks and, 111 coverage by index provider, market accessibility and, 196 MSCI weight, 114 performance as emerging market, 132 sector weights, 117, 123 T Rowe Price fund weights, 190 UK: average annual economic growth, banking during the Cold War, 54–55 dollar trading volume, 194 freedom as a portfolio driver and, 143 inflation targeting and, 147 South Africa and, 97 T Rowe Price fund weights, 190 US: average annual economic growth, banking during Cold War, 54–55 as a developed market, dollar trading volume, 194 as an early emerging market, embargo on Cuba, 55 extends lines of credit after Tequila Crisis, 73 Food and Drug Administration, 52 Latin American bank default, 60 per capita income, Russian Ruble Crisis and, 89 Ukraine, T Rowe Price fund weights, 190 United Arab Emirates (UAE), 199 United Nations, gold standard and, 100 Utilities: MSCI Frontier Markets Index weights, 199 overview, 115, 116–117, 118, 119, 120, 123, 152, 159 performance as emerging market sector, 133 T Rowe Price fund weights, 191 Valuations: analyzing, 173–175 See also Devaluation Value chain, 155 van Agtmael, Antoine, 9–10 Vanadium, 99 Vanguard Group, 192 Vanguard’s Emerging Market Stock Index Fund (VEIEX), 192 Vargas, Getúlio, 49 Volatility, 14 Volcker, Paul, 59 Voucher program, privatization and, 82 Vulnerability, foreign exchange reserves and, 23 Wall Street, development of emerging markets, 11 Wall Street Journal, 162 Wal-Mart, 41 Wealth redistribution, populism and, 52–53 Weights: benchmarks and, 111–112 passive vs active investors, 182–183 See also specific countries and sectors Weimar republic, 51 Welfare initiatives, 50 Williamson, Edwin, 49 The Wonderful Wizard of Oz, 48 Worker’s Party, 147 World Bank: as a data resource, 161–162 East Asia and, 15 extends lines of credit after Tequila Crisis, 73 gold standard and, 100 IFC and, Russian Ruble Crisis and, 89 World Trade Organization (WTO), Tequila Crisis and, 68 World War II, Latin American financial crisis begins, 54 Xiaoping, Deng, 36–38 Yeltsin, Boris, 80–90, 91 Yield curve, as a portfolio driver, 137–138 Yom Kippur War, 55 Yuganskneftegaz, 86, 94 Yukos affair, 92–94 Zedong, Mao, 36 Zimbabwe, inflation and, 51 Zulus, 96, 97 on EMERGING MARKETS Comprising 60 percent of the world’s nearly seven billion people and almost a third of global output, emerging markets are fertile ground for the global investor Yet for all their allure, many avoid emerging markets out of fear, ignorance, or a belief that they are radically different from developed world markets The sixth installment of the Fisher Investments On series is an all-encompassing guide to emerging markets It skillfully demystifies investing in far-flung corners of the world and teaches you how to effectively analyze this segment of the investing landscape for yourself Opening with an engaging overview of emerging markets, this book then provides historical perspective on the major emerging market regions —outlining the various social, economic, and political events that have shaped the investing landscape Next, it thoroughly discusses how you can identify and develop portfolio drivers and provides an introduction to security analysis With this essential information in hand, the book then details several instruments and strategies available to investors You don’t have to be a professional to successfully invest in emerging markets— but you need to be prepared Fisher Investments on Emerging Markets provides the framework that can help you to begin investing more globally About Fisher Investments Press Fisher Investments Press brings the research, analysis, and market intelligence of Fisher Investments’ research team, headed by CEO and New York Times bestselling author Ken Fisher, to all investors The Press covers a range of investing and marketrelated topics for a wide audience—from novices to enthusiasts to professionals ... Fisher Investments On Series Fisher Investments on Energy Fisher Investments on Materials Fisher Investments on Consumer Staples Fisher Investments on Industrials Fisher Investments on Emerging Markets. .. Markets Fisher Investments on Emerging Markets Fisher Investments with Austin B Fraser John Wiley & Sons, Inc Copyright © 2010 by Fisher Investments All rights reserved Published by John Wiley & Sons,... Fisher Investments on Emerging Markets FISHER INVESTMENTS PRESS Fisher Investments Press brings the research, analysis, and market intelligence of Fisher Investments research team, headed by