PM Capital

Emerging markets have been affected by a combination of factors, most obviously rising US interest rates and the subsequent appreciation of the US Dollar. However, what has not come out as clearly is the effect of rising commodity prices on economic growth.

The oil price is talked about because it is up about 40% in the past 12 months. However, that is not the whole story. The interesting factor for emerging markets is commodities are all priced in US Dollars. For example, about 10% of Brazil’s imports are oil or oil-related products. The oil price has gone up 40%, and its currency has fallen 25%. So for them to buy the same amount of product, it costs them about 85% more now compared to what it did 12 months ago. This is a severe problem for emerging markets, but a powerful relative boost for the US economy given the oil price is not rising anywhere near as fast in its currency than in other currencies.

India is a very good example of a country being impacted by rising commodity prices. It consumes 4.6 million barrels of oil a day, with a growth rate of 4.6%, making it the fourth biggest oil buyer in the world. As at end 2017 India’s total proved reserves was 0.3% of total global preserved reserves. India’s currency is down 12% in the past year, meaning its significant crude oil requirement will tend to be a large drag on economic growth. The Philippines is quite similar.

Thinking about the situation of an underlying product manufacturer in those countries, their raw material prices in the consumer goods business are rapidly rising; not just for those who use crude to power their fleets, but also those who use barley or sugar as their inputs – the sugar needs to be transported using those same fleets. Oil is also crucial in the supply of plastics and similar manufactures. All of these products in the value chain are rising sharply in local currency terms, creating the risk of inflation within domestic systems.

However, other EM economies are in a better place. Malaysia was hit hard in 2014 and 2015 when oil prices fell, because their two largest exports are crude oil and palm oil. Oil prices have risen, affecting its economy, but higher commodity prices is a benefit for their economy, so we are actively looking for further opportunities within that country. Our large Malaysian holdings are Carlsberg Brewery Malaysia and Heineken Malaysia. Other holdings include media and entertainment company Astro Malaysia Holdings and building materials firm Lafarge.

All emerging markets are very different. Some have fixed currencies, others floating currencies, some a combination of the two.  Some are commodity importers, others benefit from higher prices. The mistake people can make is you treating all emerging markets the same.

Kevin Bertoli
Portfolio Manager
PM Capital Asian Opportunities Fund
PM Capital Asian Companies Fund


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