EM Investment opportunities – not only a crude oil story..

There has been much debate over the past months about crude oil prices impacts over emerging markets (EM). When some definitely benefit from the drop in prices, others pay the price of investor’s somehow over-reaction. Emerging markets are very similar and different at the same time but investors tend to put them all in the same bucket, downgrading them all at the same time in case of any major negative backdrop.

Standard Life recently published an interview of several asset managers questioning them about crude oil prices impact among emerging markets. Although answers seem pretty straightforward and obvious, I recall here some of the main statements as investors usually tend to consider emerging markets and more particularly emerging continents as a “whole piece” rather than a more eclectic one.

As fairly acknowledged by Andrew Summers (Investec Wealth and Investment), lower crude prices are globally positive:

  • It improves consumers purchasing power;
  • It induces commodity export countries to restructure and better diversify their economy preparing ground for the next growth story.

Some are definitely current red flags

While commodity exporters are undoubtedly suffering from the lower crude prices environment, not all are to be placed on the same footing. Below are some of the most widely cited as most exposed countries. But again, contexts are different when one get into details and long-term prospects are not comparable.

  • Venezuela is undoubtedly the most exposed and endangered nation for not having been able to retain enough savings from the commmodities buyoancy years. With crude representing 95% of exports earnings, the nation’s fiscal situation is in an alarming stage, gradually driving the economy towards an inevitable collapse – A total “no-go” for investors.
  • In the same vein, Russia is in a critical position, hited by western economic sanctions and dangerously exposed to the low crude prices environment (68% crude’s export revenues). Although some remain opportunistic on specific stock picking strategies, the current situation is definitely not clear enough and unstable.
  • As a next exporter and low diversified country, Nigeria is similarly exposed (95% exports earnings) and pay now the bill of careless and over-dependance years. However, unlike Venezuela, Nigeria’s newly elected president (Buhari) brought about a wave of high expectations. While investors have temporarily stepped back, most remain in the starting blocks  as Nigeria remains anyway  one of the largest and promising growth story in Africa.
  • Less dependant on crude exports, Brazil’s current difficulties are mostly derived from fiscal imbalances, over-dependance on raw materials exports and careless management of public spending. The Petrobras corruption scandal definitely worsened Brazil’s creditworthiness resulting in massive investors outlfows. The country is now in a process of huge “spring cleaning” leaving Dilma Rousseff sole in charge of restoring investor’s confidence and laying the foundations of a new growth chapter. Notwithstanding the latter, Brazil remains anyway one of the largest economies in the world (7th largest GDP) and foreign investments haven’t stoped  flowing to the country. In fact, Temasek and GIC, the two largest Singapore Sovereign Wealth funds have been increasing their share of investments in Latin America, opening offices in Brazil and investing in large educational and infrastructure projects.  China is not on rest, having made sizeable commitments to the Latin American region (USD250bn expected over the next years).

 While others remain little gems …

Be it oil producer or not, some emerging countries were already unattractive for many reasons well before the oil crisis (Venezuela, Russia, etc.).But as fairly mentioned by the EM asset managers interviews by Standard Life, investing in those new growth stories goes well beyond crude oil prices and relates more to growth prospects, middle-class rise, industrial development, etc.

As a matter of fact, all oil producers cannot be placed in the same bucket.

Alex Wolf from Standard Life Investment finishes mentioning Mexico which engaged a few years ago in a processs of diversification away from oil production. As fairly mentioned, the Mexican economy is already one of the most diversified from Latin America and boasts from a very interesting integration with the US. Although timing is not entirely there, Mexico is definitely in a good pole position and should gradually get increased interest from international investors.