Bloomberg Markets - March 2014
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4 BLOOMBERG MARKETS March 2014
March
v o l u m e 2 3 n u m b e r 3
SPECI AL REPORT: EMERGI NG MARKETS
FEATURES
Russian President
Vladimir Putin in Paris
Photograph by
STEPHANE LAVOUE/
PASCOANDCO
ON THE COVER
30 The Gulf Speeds Ahead
The standouts in our annual rankings are Qatar, the U.A.E. and Saudi
Arabia, which are using their oil wealth to diversify their economies.
by WEIYI LIM
38 Remaking Russias Economy
Vladimir Putin and Rosneft boss Igor Sechin are spearheading the
drive to augment state capitalismas growth flags and investors fret.
by IRINA REZNIK, STEPHEN BIERMAN and HENRY MEYER
50 Mexico and Nigeria: Its Their Turn
The economist who coined the BRIC acronym says investors should
watch a new group of countries in Latin America, Africa and Asia.
by JIM O NEILL
54 Selling Korean Cool
CJ Groups Miky Lee is leading the $27 billion food-to-entertainment
conglomerate as her brother fights tax-evasion charges.
by YOOLIM LEE
62 Panama Digs Deep
The country is spending $5.25 billion to expand its 100-year-old
canal, in a bid to retain its edge in international commerce.
by ERIC SABO
68 A Heavier Touch
Chief U.K. markets regulator Martin Wheatley is racing to clean up
a banking culture tainted by Libor manipulation and insider trading.
by LINDSAY FORTADO and STEPHANIE BAKER
74 Ethanol Evangelist
In an industry littered with bankruptcies, Todd Becker has built
Green Plains into a $3.5 billion powerhouse.
by JOHN LIPPERT and MARIO PARKER
80 The Fight Over Canadas Riches
First Nations peoples are asserting their right to be consulted before
drillers and miners use their land.
by JEREMY VAN LOON
80
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14 Against the Stock Market Herd
16 Bloomberg Global Poll: Confidence Reigns
18 Stranded Sailors
20 Abes Womenomics
22 Green Racing Formula
24 Tips From Billionaire Alexey Mordashov
8 Editors View
Finding the Next BRICs
10 Letters
26 Bloomberg View
How Panama Can Seize Its Moment
COMMENTARY
AGENDA
March
c o n t i n u e d
6 BLOOMBERG MARKETS March 2014
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90
STRATEGI ES
90 Equities
Why active fund managers
are feeling optimistic
by DOUGLAS EDLER, CFA,
and JON ASMUNDSSON
92 Cheat Sheet
Emerging Markets
93 Equities
Profiting From Deals
by ERIC ROSEMAN
94 Portfolios
Lowering Volatility
by NICK BATURIN
96 Influential News
98 Private Equity
Exit Signs
by ANITA KHALILI
and ALICIA LOONEY
99 Riskless Return
Best Defense
by NICK TABOREK
100 Whats New
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You can
privatize
enterprises, but
they wont be
competitive,
says Putin
spokesman
Dmitry Peskov.
Finding the
Next BRICs
Its been a bumpy 12 months for some of the worlds biggest
emerging markets, especially the BRICsBrazil, Russia, India
and China. Only one of those four, China, finished in the top 10
in BLOOMBERG MARKETS rankings of the best emerging markets
for investing. The standouts this year are smaller, so-called
frontier, markets, including the Persian Gulf nations of Qatar,
the United Arab Emirates and Saudi Arabia, which some inves-
tors see as ripe with potential, Weiyi Lim writes in the lead story
of our special report (THE GULF SPEEDS AHEAD, page 30).
In Russia, where growth likely slowed to 1.3 percent last year,
President Vladimir Putin is reasserting the states role in the
economyto the chagrin of many investors. This shift is most
notable at OAO Rosneft, the publicly traded, state-run oil giant
led by longtime Putin ally Igor Sechin, write Irina Reznik,
Stephen Bierman and Henry Meyer (REMAKI NG RUSSI AS
ECONOMY, page 38). You can privatize enterprises, but they
wont be competitive, Putin spokesman Dmitry Peskov says.
In South Korea, the economy is dom-
inated not by the state but by the chae-
bol. Yoolim Lee talks with the woman
whos now leading one of those family-
run conglomerates: CJ Groups Miky
Lee, who helped put Korean pop cul-
ture on the map (SELLING KOREAN
COOL, page 54).
In Panama, No. 6 in our emerg-
ing-markets ranking, Eric Sabo reports on the countrys $5.25
billion canal renovation, a bid to retain its edge in international
trade (PANAMA DIGS DEEP, page 62). And Jim ONeill, the for-
mer Goldman Sachs Group Inc. economist who coined the term
BRIC, has his eye on a new group of emerging and frontier mar-
kets (MEXICO AND NIGERIA: ITS THEIR TURN, page 50)in-
cluding a quartet of countries he calls the MINTs.
EXECUTIVE EDITOR
8 BLOOMBERG MARKETS March 2014
EXECUTIVE EDITOR
Ronald Henkoff
MANAGING EDITOR
Dan Ferrara
CREATIVE DIRECTOR
Siung Tjia
ASSISTANT MANAGING EDITOR
Michael S. Serrill
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Fleeced by Fees
Ive never believed that
managed futures should
have any role whatsoever
in the allocations of long-
term investors. Short-
term speculators, as your
story illustrates, shouldnt bother either. When a secu-
rity is bereft of any intrinsic value (interest, dividends,
earnings growth), put your hand over your wallet pocket!
JOHN C. BOGLE
Founder, Vanguard Group Inc.
Bryn Mawr, Pennsylvania
A Gift to Billionaires
FEBRUARY 2014
I have always enjoyed Bloomberg articles,
but this one struck home. The technique
undermines the tax system as a whole and
gives openings to the political few to play
with as they desire.
DAN GOULDEN
Management representative
Wellman Dynamics Machining
& Assembly Inc.
York, Pennsylvania
Education Empire
FEBRUARY 2014
I want to thank you for your brilliant,
in-depth article on Laureate Education
Inc., which is currently being read and
reread by Thunderbird School of Global
NOVEMBER 2013
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Management alumni based everywhere
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Too Good to Be True
FEBRUARY 2014
Thank you for your focus on such scams,
which are destroying the socioeconomic
condition of West Bengal. We, the people
of West Bengal, are helpless. We want a
new leader of a new India as well as a new
leader of West Bengal.
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Kolkata
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12 BLOOMBERG MARKETS March 2014
Colombian Tungsten
Mine Will Be Closed
The Colombian government said in
December it would seize and close a
tungsten mine run by FARC guerril-
las. In Tungstens Tainted Trail
(September 2013), BLOOMBERG
MARKETS reported that the Colombian rebel group funneled the illegally mined
metal to companies that exported it and major multinational corporations
bought parts that originated from the tainted supply line. After the story was
published, the European Union wrote tough laws to prevent companies from
buying minerals that fund the conflict in Colombia.
MICHAEL SMITH AND ANDREW WILLIS
CFTC Investigating Managed Futures
The Commodity Futures Trading Commission is investigating the effect that high
fees in managed-futures funds have on customers. In Fleeced by Fees, BLOOMBERG
MARKETS reported that in the decade ended on Dec. 12, 2012, 89 percent of the $11.5
billion of profits in 63 funds was consumed by commissions, fees and expenses. The
article spurred U.S. Senators Elizabeth Warren, a Democrat from Massachusetts,
and Bill Nelson, a Florida Democrat, to urge the CFTC to work with the U.S. Secu-
rities and Exchange Commission to study ways to provide clearer disclosure of fees
charged on retirement accounts invested in the funds. In announcing the inquiry in
December, CFTC Commissioner Bart Chilton said the agency must protect inves-
tors. That includes highlighting, and potentially banning, excessive fees that can
gobble up profits, he said. DAVID EVANS
Letters
EQUITIES. COMMODITIES. ALTERNATIVES. BONDS.
Morningstar Rating as of 31 December 2013 for
the institutional class shares; other classes may have
different performance characteristics. Overall rating for
the Multisector Bond category. Fund ratings are out of
5 Stars. For the PIMCO Income Fund: Overall 4 Stars
(219 funds rated); 3 Yrs. 5 Stars (219 funds rated); 5
Yrs. 4 Stars (176 funds rated); 10 Yrs. N/A Stars (113
funds rated). For funds with at least a 3-yr history,
Morningstar calculates a Morningstar Rating based
on a risk-adjusted return measure that accounts for
variation in a funds monthly performance (including
the effects of sales charges, loads and redemption
fees) with an emphasis on downward variations and
consistent performance. The top 10% of funds in
each category receive 5 stars, the next 22.5% receive
4 stars, the next 35% receive 3 stars, the next 22.5%
receive 2 stars and the bottom 10% receive 1 star.
The Overall Morningstar Rating is a weighted average
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Go to pimco.com/income
Seeking consistent income
Global opportunities
Risk management
U P D A T E S
C o r r e c t i o n
In the Activist Buys GM item on the Influential News page (February 2014), we
misstated the enterprise value of General Motors Co. It was $42.3 billion on Nov. 25.
TYPE PMCO <GO>
14 BLOOMBERG MARKETS March 2014
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PEOPLE, COMPANI ES AND I DEAS THAT MOVE MARKETS
BANK STRATEGISTS AGREE:
U.S. stocks are going up in 2014, at least
a bit. At the beginning of January, after
the Standard & Poors 500 Index closed
out 2013 at 1,848, their end-of-year tar-
gets ranged from 1,850 to 2,100. The
median among 20 sell-side prognosti-
cators was 1,950, which would be a 5.5
percent gain if it pans out. In other
words, after big advances for U.S. stocks
in four of the past five years, including
a robust 32 percent return for the S&P
500 last year, the forecast is for more.
Against
the Herd
AS WALL STREET FIRMS PREDICT ANOTHER
GOOD YEAR FOR U.S. STOCKS, CONTRARIANS
SEE RISKS FROM STRETCHED VALUATIONS,
INFLATION AND THE FED.
March 2014 BLOOMBERG MARKETS 15
What could possibly go wrong? For-
tunately, there are always a few money
managers and strategists ready to ad-
dress that question. Their present con-
cerns encompass inflation, Federal
Reserve tapering, stock valuations and
technical chart breakdowns.
David Rosenberg, chief economist at
Gluskin Sheff & Associates Inc., says
the biggest stock market risk right now
is that the Fed will be forced to raise in-
terest rates as the economy grows faster
than expected. That flies in the face of
current wisdom. While the Fed has be-
gun to withdraw its monetary support
for the economy by trimming its bond
purchases, most economists say the
central bank will keep its benchmark
funds rate near zero at least into 2015.
A market that shrugged off bad news
for the past several years may quickly
become one underwhelmed by good
news, in Rosenbergs thinking. One
thing that we learned in this cycle is
that you can have very weak growth
but a tremendous surge in the mar-
ket when the Fed is providing a tre-
mendous amount of liquidity, he says.
Id expect that when we actually get
growth, and we get the Fed doing some-
thing different, were going to get dif-
ferent results in the market.
Jim Paulsen, chief investment strat-
egist at Wells Capital Management in
Minneapolis, describes a scenario that
has a lot in common with Rosenbergs.
Inflation, or inflation fears, is a possi-
bility in 2014, Paulsen says. He sees
nominal economic growth accelerating
to as much as 6 percentwith gross do-
mestic product expansion at 3.5 per-
cent plus inflation, measured by the
GDP price deflator, up to 2.5 percent.
The threat of an overheating econ-
omy would then raise concern that the
Fed will be unable to withdraw its ex-
traordinary monetary support in an or-
derly fashion, Paulsen says. The
methodical and well-controlled mone-
tary tapering which greets us here at
the beginning of the year could turn to
a panic taper, Paulsen wrote in a
Jan. 2 letter to clients. That would
wreak havoc in the bond market, and
boost stock market volatility, he says.
Paulsen forecasts that the S&P 500
will climb as high as 2,000 at some
point in 2014, a gain of 9 percent from
when he published his note, and then
slide, finishing with no gain at all for
the year. If that comes to pass, it likely
would be a setback and not an end to
the bull market, which he says has more
years to go.
Sam Stewart, chairman of Wasatch
Advisors Inc. in Salt Lake City, predicts
a rapid stock market sell-off at some
point in 2014. He argues that stock val-
uations are stretched after the five-year
bull market, especially when rising
price-earnings ratios are compared
with slowing growth ratesthe so-
called PEG ratio. Based on profits and
profit growth for the most recent 12
months, the S&P 500s PEG ratio was
3.1 at the beginning of the year, com-
pared with a 20-year average of 1.1, ac-
cording to Stewart. Thats higher than
it was in 2007, when the market
touched its pre-financial-crisis peak,
he says.
If stocks are expensive, theyre
vulnerable to unpleasant surprises,
Stewart says. The nationwide steel
strike in 1959 and the failure of Long-
Term Capital Management in 1998 are
examples of events that triggered sell-
offs in overvalued markets, according
to Stewart, whose Wasatch World In-
novators Fund beat 99 percent of its
peers during the past five years.
For Carter Worth of Oppenheimer
& Co., the New York investment bank
and wealth manager, the big risk may
be simply that total returns for U.S.
stocks have been positive for five years
running. Worth is his firms chief mar-
ket technician, meaning his forecasts
are based on historical charts and
patterns, not economic or company
fundamentals.
Since 1927, the S&P 500 has had five
consecutive winning years on six previ-
ous occasions. The average return in the
next year was negative 2.3 percent, ac-
cording to Worth. And the peak-to-
trough decline in that sixth year, as
opposed to the calendar year move, av-
eraged 23 percent. At a minimum, 2014
has high odds to be a below-average
year, Worth says, with the possibility
that its not only below average but has
something quite ugly. LU WANG
50
40
30
20
10
0
1880s 1890s 1900s 1940s 1980s 1910s 1950s 1990s 1920s 1960s 2000s 1930s 1970s 2010s
EXPENSIVE,
OR NOT
Nobel laureate Robert Shillers cyclically adjusted
price-earnings ratio shows that stocks are
expensive versus the long-term average of 16.5,
although not as overvalued as in 2000 and 2007.
Source: Yale University
1929 Stock Market Crash
Credit Crunch of 1966
2000 Technology Stock Bubble
LONG-TERM
AVERAGE
OF 16. 5
16 BLOOMBERG MARKETS March 2014
AGENDA
ECONOMICS
Here i s a guy who trai ned hal f of
the central bankers i n the worl d.
Donald Kohn on the nomination of Stanley Fischer to the
post of Fed vice chairman, which Kohn once held
WHAT I S YOUR VI EW OF . . . ?
Deteriorating
Stable Improving
No Idea
Positive sentiment is at an all-time high for the
U.S., the euro zone and the global economy,
while its negative on China.
THE GLOBAL ECONOMY
10% 1% 30% 59%
72%
49%
94%
22% 6%
14% 35% 2%
36% 49% 2% 13%
84%
62%
THE EURO-ZONE ECONOMY
THE CHINESE ECONOMY
Condence Reigns
AS GROWTH STRENGTHENS IN THE U.S., INVESTORS ARE MORE OPTIMISTIC ABOUT
THE WORLD ECONOMY THAN AT ANY TIME SINCE THE GREAT RECESSION.
THE RECOVERY IS
accelerating in the U.S.,
Europe is healing, and
investors are feeling
some animal spirits,
according to the
Bloomberg Global Poll.
Fifty-nine percent of
bankers, traders and
money managers said the
world economy is
improving, the most
bullish response since
the poll of Bloomberg
customers began in 2009.
Without doubt,
confidence is the single
most important determi-
nant for growth, says
Wilhelm Schroeder,
a poll participant and
managing director of
Schroeder Equities
GmbH in Munich.
Developed countries are
playing by far the most
important part of the
recovery in confidence.
SIMON KENNEDY
The quarterly Bloomberg Global Poll
was conducted Jan. 16 to 17 by
Selzer & Co. of Des Moines, Iowa.
Sample size: 477 investors, bankers
and traders who are Bloomberg
customers. Margin of error: plus
or minus 4.5 percentage points.
89%
T
O
P
:
A
N
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LOOKI NG
AHEAD
Unfavorable
16%
Favorable
68%
No idea
16%
WHAT WI LL THE AVERAGE ANNUAL
GROWTH RATE BE I N THE U. S.
OVER THE NEXT DECADE?
Amid growing optimism about the strength of the recovery and a favorable
view of incoming Federal Reserve Chairman Janet Yellen, a majority of poll
respondents still say that U.S. growth in the coming decade will be subpar.
WHAT I S YOUR VI EW OF
I NCOMI NG FED CHAI R
JANET YELLEN?
Bloomberg
Global Poll
About
2%
44%
About 3% 40%
Less than 2% 8%
THE U.S. ECONOMY
About 4% 6% No idea 2%
A Hindsight Mirror is useful for looking
back at past investments and seeing them
clearly for what they were vs. what they are
now. Yes, very useful, if there was such a thing as
a Hindsight Mirror. Fortunately, there is such a thing as
Intentional Investing
. The Fund
will, under most circumstances, consist of all stocks in the Index.
The Index includes 100 of the largest domestic and international
nonfinancial companies listed on the Nasdaq Stock Market based on
market capitalization.
There are risks involved with investing in Exchange-Traded Funds
(ETFs) including possible loss of money. The funds are not actively
managed and are subject to risks similar to stocks, including those
related to short selling and margin maintenance. Ordinary brokerage
commissions apply. Shares are not FDIC insured, may lose value and
have no bank guarantee.
Holding Weights as of 9/18/13: Microsoft 7.66%, Google 6.74%,
Amazon.com 3.91%, Cisco Systems 3.65%, Intel 3.27%, Starbucks
1.59%. Holdings are subject to change.
Shares are not individually redeemable and owners of the shares
may acquire those shares from the Funds and tender those
shares for redemption to the funds in Creation Unit aggregations
only, typically consisting of 50,000 shares.
PowerShares
, BlackRock
and the iShares Core ETFs graphic are trademarks of BlackRock, Inc. iS-10412-0114
Type ISHA <GO>
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26 BLOOMBERG MARKETS March 2014
BY THE EDITORS OF BLOOMBERG VIEW
To read more editorials, type VIEW <Go> on the Bloomberg Professional service or
go to BLOOMBERG.COM/VIEW.
With the worlds second-largest free-trade zone, four con-
tainer-vessel seaports, the Pan-American Highway and numer-
ous free-trade agreements, Panama is on its way to becoming
the Singapore of the Americas. And as Eric Sabo reports in
Panama Digs Deep (page
62), the expansion of the Pan-
ama Canal now under way is
only part of the massive in-
frastructure spending that is
propelling the Panamanian
economy.
Yet to reap the full bene-
fits of such investment, and
to address one of the hemi-
spheres worst cases of eco-
nomic inequality, Panama
needs to follow Singapores
lead in fighting corruption.
Singapore placed fifth out of
177 countries in last years
Corruption Perceptions In-
dex compiled by Transpar-
ency International; Panama
was 102nd. (The higher the ranking, the less corruption.)
Executives surveyed by the World Economic Forum have
pegged corruption as Panamas biggest problem for business.
Many of the qualities that have made Panama a hub for
global trade and finance have also attracted malefactors. Drug
cartels from Mexico and Colombia take advantage of its loca-
tion, dollarized economy and free-trade zones to move their
products and launder their proceeds. Panamas low tax rates
make it a haven for those seeking to shelter or hide assets. Rev-
enue from the canal and huge investments in infrastructure
feed temptations for misappropriation, bid rigging and bribery.
How Panama Can
Seize Its Moment
Ricardo Martinelli, the president of Panama, makes no secret
of his admiration for Singapore, the island state that has turned
itself into a thriving Asian financial and trading center. As he has
put it, We copy a lot from Singapore, and we need to copy more.
And notwithstanding five successive elected civilian
governments since the 1989 U.S. intervention that toppled
General Manuel Antonio Noriega, Panamas civil institutions
and democratic culture remain weak. The judiciary is seen
as lacking independence.
The press faces intimida-
tion. Martinellis leadership
has been marked by scandals
and efforts to amass execu-
tive power.
This Mays presidential
elections offer Panamanians
a chance to bring in a new ad-
ministration committed to
attacking corruption with
greater urgency. It could
start with transparencyfor
example, by posting online
more details on corporate
ownership and taking other
steps recommended by the
Organization for Economic
Cooperation and Develop-
ment. Panama also has yet to sign on to the World Trade Or-
ganizations government procurement agreement.
Strengthening the judiciary and building up anti-corruption
institutions will take time. In the interim, a few aggressive
prosecutions of cases involving corruption and abuses of au-
thority would be a down payment on reforms to follow. What
has made Singapore such a success, after all, isnt just its free-
dom of commerce but its commitment to following the rules.
CONTINUED PROGRESS IN PANAMA ISNT
A GIVEN. IT WILL REQUIRE THE SUCCESSOR
TO PRESIDENT RICARDO MARTINELLI
TO ATTACK CORRUPTION WITH URGENCY.
2014 Northern Trust Corporation. Head Ofce: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liabilit y in the U.S. Products and services provided by subsidiaries of Northern Trust
Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market ofces, visit northerntrust.com/disclosures.
In this tumultuous market, youre always looking for a competitive edge. And while transparency is often seen
as costly and complicated, it doesnt have to be. In fact, it can work to your advantage. Our single-platform
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Transparency
is our priority.
But thats
probably clear.
Alternative Fund Administration | Operations Outsourcing | Investor Services | Custody
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BLOOMBERG MARKETS 31 BLOOMBERG MARKETS 31
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32 BLOOMBERG MARKETS March 2014
nancial capital of the United Arab Emir-
ates. Tourists were once again jostling for
a spot from which to watch the dancing
fountains that adorn the downtown area.
Recurring trafc jams, increasing retail
sales and a rise in airport passengers
were other signals for Khan, the senior
executive ofcer at Dubai-based Shuaa
Asset Management.
The signs in the economy were visi-
ble before the market took off, says
Khan, whose rm had 780 million dir-
hams ($212 million) under management
at the end of September. We waited for
the pop and eventually it happened.
Dubais benchmark stock index, in the
doldrums for two years, rose 117 percent
in 2013, including reinvested dividends,
leading the world. That helped Khans
Arab Gateway Fund, which invests
throughout the Middle East and North
Africa, return 39 percent.
Dubais performance was part of a
surge by three Persian Gulf nations
Qatar, the U.A.E. and Saudi Arabia
which jumped to the top of BLOOMBERG
MARKETS third annual ranking of the
most-promising frontier markets in
which to invest.
Three Asian nations led the separate
emerging-markets ranking, with China
No. 1 for the third consecutive year, fol-
lowed by South Korea and Malaysia.
Panama was No. 6; its economy took of
as thousands of workers labored on an
expanded canal that will be able to ac-
commodate the worlds big ships. (For
more on Panama, see Panama Digs
Deep, page 62.)
MSCI Inc., the publisher of equity
indexes, designates countries as emerg-
ing or frontier based on a variety of cri-
teria, including trading volumes,
restrictions on foreign investors, cor-
porate governance, and currency and
political stability.
The BLOOMBERG MARKETS ranking is
based on 19 measures of the investing
climate, from forecasts of gross domestic
product growth for the next two years to
the ease of doing business. The gains for
the Gulf nations came as Brent crude oil
prices remained above $100 a barrel for
the third year, and the petroleum pro-
ducers used their huge revenues to diver-
sify their economies. Qatar and the U.A.E.
have progressed to a point that MSCI
said on June 11 it would upgrade them
from frontier to emerging status in May.
In these countries, you see a burst of
construction, which is reminiscent of
what you saw in China in the 2000s,
when they came up with the high-speed
bullet trains, the airports and all the new
infrastructurewhich opened up the in-
terior of the country, says Arjuna Ma-
hendran, chief investment ofcer at the
wealth management division of Dubai-
based bank Emirates NBD PJSC.
Saudi Arabias economy, the largest in
the Middle East, expanded at a 5.9 per-
cent average pace during the decade
ended on Dec. 31, up from 2.3 percent in
the previous 10 years and faster than the
global average of 3.8 percent, according
to the International Monetary Fund. Qa-
tar will probably post the quickest growth
in 2014 at 5 percent, while Saudi Arabia
and the U.A.E. will both expand about 4
percent, according to the IMF.
Overall, frontier markets were a more
Saudi Arabias King
Abdullah Economic
City, far right, under
construction in 2008.
Right, Dubai hosted the
13th Dubai Airshow in
November.
March 2014 BLOOMBERG MARKETS 33
profitable place to invest in 2013 than
emerging marketsa trend thats likely
to continue into 2014, analysts say. The
MSCI Frontier Markets Index rose 21
percent in 2013, outpacing the MSCI
Emerging Markets Index by 26 percent-
age points, the widest annual gap since
2005. Corporate earnings in the 26 coun-
tries that make up the frontier index have
risen to the highest level in five years.
Profits in the MSCI emerging index,
which is dominated by Brazil, Russia, In-
dia and China, are still 11 percent below
their 2011 high.
In late January, emerging-markets
currencies saw their worst sell-of in ve
years as Chinas economy showed new
signs of weakness. As of Jan. 24, more
than $940 billion in value had been
erased from emerging-markets equities
since the U.S. Federal Reserve signaled in
May that it would start scaling back on
bond purchases that boosted demand for
high-yielding securities, including devel-
oping-nation stocks and bonds.
Among the so-called BRICs, China is
the only market in the top 10 of the 22
emerging-markets countries ranked by
BLOOMBERG MARKETS. China is going to
continue to grow, although at a slower
pace than in the past, says Mark Mobius,
who oversees $53 billion as chairman of
Templeton Emerging Markets Group.
The reform process is going to result in
more volatility.
China expanded in 2013 at a 7.7 per-
cent rate, its weakest annual growth
since 1999. The economy is forecast to
grow 7.4 percent in 2014, according to a
Bloomberg survey of economists. The
Shanghai Stock Exchange Composite In-
dex slumped 3.9 percent in 2013, includ-
ing reinvested dividends, as slowing
growth curbed corporate earnings.
The Chinese government has pledged
to stimulate the economy by allowing
more private investment in state-
controlled industries. And for the rst
time since the one-child policy was
proclaimed in 1979, the Communist
Party said on Nov. 15 it will permit cou-
ples to have two children if either parent
is an only child. The move is intended to
repopulate a rapidly aging workforce.
The government, in a four-day Com-
munist Party conclave in November, also
said it will accelerate convertibility of the
yuan, free up interest rates, improve
Treasury yield curves and let qualified
private investors set up small- to me-
dium-sized banks.
The other BRICs are oundering. As of
September, India, which is No. 21 in the
BLOOMBERG MARKETS ranking, had seen
four straight quarters of economic
1 CHI NA 69. 6 7. 4 1. 4 18. 3 96
2 SOUT H KORE A 68. 4 3. 5 1. 1 19. 5 7
3 MAL AYSI A 62. 0 5. 0 2. 4 36. 8 6
4 CHI L E 59. 3 4. 3 1. 7 40. 1 34
5 T HAI L AND 59. 0 4. 5 1. 9 57. 9 18
6 PANAMA 58. 8 6. 7 0. 04 57. 2 55
7 PE RU 57. 3 5. 5 2. 1 74. 3 42
8 L AT VI A 56. 3 4. 1 0. 6 49. 8 24
9 POL AND 53. 2 3. 2 1. 3 25. 7 45
1 0 CZ ECH RE PUBL I C 52. 6 2. 1 1. 0 25. 3 75
1 1 COLOMBI A 48. 9 4. 6 1. 6 63. 6 43
1 2 T URKE Y 48. 3 4. 1 1. 4 130. 4 69
1 3 HUNGARY 46. 2 1. 9 0. 9 186. 2 54
1 4 RUSSI A 45. 8 2. 5 0. 8 107. 0 92
1 5 BRAZ I L 45. 7 2. 6 1. 0 100. 1 116
1 6 PHI L I PPI NES 45. 3 6. 1 2. 6 39. 5 108
1 7 ME XI CO 43. 8 3. 7 2. 8 38. 8 53
1 8 I NDONESI A 39. 6 5. 7 2. 4 103. 7 120
1 9 SOUT H AF RI CA 38. 3 3. 1 2. 3 114. 7 41
20 MOROCCO 37. 9 4. 4 2. 1 157. 8 87
21 I NDI A 28. 6 5. 2 2. 6 173. 3 134
22 EGYPT 20. 0 3. 3 1. 3 642. 1 128
TOTAL
SCORE
PROJECTED ANNUAL
GDP GROWTH,
2014 AND 2015, %
PRI CE-TO- BOOK
RATI O OF PRI MARY
EQUI TY I NDEX
TWO-YEAR CDS
SPREAD, BASI S
POI NTS
EASE OF DOI NG
BUSI NESS, RANK
Sources: Bloomberg, Economist Intelligence Unit,
International Monetary Fund, Transparency
International, World Bank, World Economic Forum
FOR HOW WE CRUNCHED THE NUMBERS, SEE PAGE 36.
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34 BLOOMBERG MARKETS March 2014
growth below 5 percent, while Standard
& Poors said in November it may cut the
countrys credit rating to junk. The GDP
of Brazil, No. 15 on the emerging-markets
list, fell 0.5 percent in the third quarter,
the biggest drop since the rst quarter of
2009. Russia, No. 14, saw its GDP expand
1.3 percent in 2013, also the weakest rate
since 2009. Russias growth has deceler-
ated or remained unchanged every quar-
ter since Vladimir Putin won a new term
as president in March 2012. (For more on
Russia, see Remaking Russias Econ-
omy, page 38.)
To some extent, the emerging markets
were at the mercy of the Fed decision to
taper its bond purchases. Such macro
forces had less impact on frontier mar-
kets, says Sean Wilson, chief investment
officer at New Yorkbased LR Global
Partners, which oversees about $200
million in developing-nation invest-
ments. Its the local consumption
growth, infrastructure spending and re-
forms, the broadening and deepening -
nancial services sectors that matter to
these markets, he says. If you looked at
each one of the countries, theres some
domestic infrastructure plays that are
propelling the economy.
It was the construction and retail sec-
torsnot the state-owned oil and gas in-
dustriesthat led the big market gains in
Qatar, the U.A.E. and Saudi Arabia.
Qatar, which has the worlds third-
largest reserves of gas and the highest per
capita income, will host the 2022 soccer
World Cup. This is the largest sports
event in the world, says Rami Sidani, a
money manager at Schroder Investment
Management Ltd. in Dubai. And Qatar is
going to be spending more than $180 bil-
lion in infrastructure projects to be ready
to hold this event. The tiny Gulf coun-
trys GDP last year was $200 billion, the
IMF says. In Saudi Arabia, strong oil
prices have allowed the government to
spend billions each year on infrastruc-
ture, housing, schools and hospitals,
says Brent Clayton, an LR Global emerg-
ing-markets money manager. While
Saudi Arabia is known for its oil, it is the
nonoil sectors of the economycompa-
nies tied to consumption growth and
construction spendingthat represent
the real prize to investors.
Only investors within the Gulf Coop-
eration CouncilBahrain, Kuwait,
Oman, Qatar, Saudi Arabia and the
1 QATAR 73. 4 5. 6 1. 9 26. 1 48
2 UNI TED ARAB EMI RATES 72. 5 3. 8 1. 4 116. 6 23
3 SAUDI ARABI A 72. 3 4. 2 2. 2 26. 9 26
4 ESTONI A 64. 9 3. 3 1. 2 26. 5 22
5 BAHRAI N 61. 0 3. 6 0. 9 147. 8 46
6 SLOVAKI A 58. 8 2. 4 0. 8 25. 7 49
7 L I T HUANI A 58. 7 4. 0 0. 8 49. 4 17
8 BULGARI A 55. 6 2. 2 0. 7 62. 6 58
ROMANI A 55. 6 2. 8 0. 2 86. 0 73
1 0 KAZ AKHSTAN 52. 9 5. 7 0. 7 91. 4 50
1 1 SLOVE NI A 52. 6 0. 4 0. 8 245. 8 33
1 2 VI E T NAM 51. 5 5. 7 1. 8 131. 0 99
1 3 CROAT I A 50. 8 1. 2 0. 9 248. 0 89
1 4 ARGE NT I NA 41. 5 2. 4 0. 5 2, 370. 5 126
1 5 NI GE RI A 38. 3 7. 1 2. 7 335. 2 147
1 6 VE NE Z UE L A 26. 9 1. 1 0. 02 1, 194. 5 181
TOTAL
SCORE
PROJECTED ANNUAL
GDP GROWTH,
2014 AND 2015, %
PRI CE-TO- BOOK
RATIO OF PRIMARY
EQUI TY I NDEX
TWO-YEAR CDS
SPREAD, BASI S
POI NTS
EASE OF DOI NG
BUSI NESS, RANK
Sources: Bloomberg, Economist Intelligence Unit,
International Monetary Fund, Transparency
International, World Bank, World Economic Forum
FOR HOW WE CRUNCHED THE NUMBERS, SEE PAGE 36.
Renderings of
Al-Wakrah
stadium,
planned for the
2022 World
Cup in Qatar.
12-IB13-684CH657
Interactive Brokers
for Institutions
interactivebrokers.com/ria
Interactive Brokers LLC is a member of NYSE, FINRA, SIPC.
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independent RIA on
Interactive Brokers platform?
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36 BLOOMBERG MARKETS March 2014
Morgan Stanleys Drinkall likes Argen-
tina (No. 14), Pakistan and Romania
(No. 8), each of which, he says, has insti-
tuted policy changes that will trigger
faster economic growth.
Andy Brown, a London-based emerg-
ing-markets money manager at Aber-
deen Asset Management Plc, which
oversees about $322 billion, has a long
list of what he calls good quality public
frontier-market companies. He names
Nairobi-based East African Breweries
Ltd. and Safari.com. In Nigeria, Zenith
Bank is locally owned and managed and
has a very strong deposit-gathering fran-
chise, Brown says. Most importantly, it
is well capitalized, so it has a bufer when
the bad times come.
Bad times come more often to frontier
markets than to their emerging counter-
parts, and investors have to be acutely
aware of the risk, Brown says. One issue is
the markets small size. About $6.2 bil-
lion of Dubai-based shares changed
hands in December, versus $613 billion
in China, according to data compiled by
Bloomberg. From a liquidity perspec-
tive, you have to be long term in your ap-
proach because it costs a lot to trade, he
says. The markets are relatively thin.
You dont really want to be trading in and
out on a regular basis. It can certainly be
a bumpy ride.
WEIYI LIM COVERS EMERGING MARKETS AT
BLOOMBERG NEWS IN SINGAPORE.
[email protected] WITH ASSISTANCE
FROM SARMAD KHAN IN DUBAI AND
ALEX MCINTYRE IN NEW YORK.
because of the young population, the
consumer spending power, fast-grow-
ing GDP, low government debt. Prices
are very attractive. I would rank them
higher than Middle East countries. Ni-
geria ranks No. 15 in the BLOOMBERG
MARKETS frontier list; Kenya is not
ranked.
U.A.E.can invest directly in Saudi Ara-
bia, where the benchmark stock index
rose 26 percent in 2013. Outsiders access
the market through mutual funds and
derivatives sold by investment banks.
The comeback story of the region is
the emirate of Dubai, which at the height
of the nancial crisis was on the verge of
default. It has been a key beneciary of
the unrest elsewhere in the Middle East,
says Tim Drinkall, a New Yorkbased
money manager at Morgan Stanley In-
vestment Management. Your tradi-
tional tourist destinations have been
places like Beirut, Lebanon, and all of
Egypt, he says. All those destinations
essentially have been closed down. You
are nding a tourism pickup in Dubai.
The emirate also won the right to
sponsor World Expo 2020, an event held
every ve years that is a stage for nations
to show off their economic progress.
This conrms Dubais position as the -
nancial gateway, the trading hub, the link
between the East and the West,
Schroders Sidani says. The Dubai econ-
omy will grow an average of 6.4 percent a
year over the next three years, Barclays
Plc said in a Nov. 26 report.
Sven Richter, who oversees about
$260 million as managing director of
frontier markets at Johannesburg-
based Renaissance Asset Management
Ltd., says the top frontier markets arent
in the Middle East; theyre in Africa. At
the moment, the best opportunity is in
Kenya and Nigeria, Richter says,
Lenovo workers assemble
smartphones in Wuhan. China is
still the No. 1 emerging market.
DBC
PowerShares DB
Commodity Index
Tracking Fund
DBC
Sechin, left, and
Putin began
working together
in the 1990s.
March 2014 BLOOMBERG MARKETS 39
40 BLOOMBERG MARKETS March 2014
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worlds largest publicly traded oil com-
pany by output and reserves. During
a decade at Rosneft, Sechin has turned it
into something resembling in size the
gargantuan Soviet ministry that was
once in charge of oil production, mainly
by swallowing up rivals. Beginning in
2004, when Putin appointed him Ros-
nefts chairman, Sechin arranged the
companys takeover of the main assets
of Mikhail Khodorkovskys Yukos Oil
Co., according to Khodorkovsky and for-
mer Yukos managers Bruce Misamore
and Alexander Temerko. Yukos was
Russias largest crude producer at the
time. Last year, having become Rosnefts
CEO in May 2012, he orchestrated the
companys $55 billion purchase of TNK-
BP, a BP Plc oil joint venture in Russia.
Sechin is the leading exponent of Pu-
tins stated determination to restore the
governments role in the Russian econ-
omy. Putin used Rosneft, through its ac-
quisitions, to return Russian oil to state
control. The company, which is 69.5 per-
cent government owned, controls about
40 percent of Russias crude output. In
a similar vein, Putin re-established
majority state control of natural gas
exporting behemoth OAO Gazprom.
The company had been privatized in the
mid-1990s under his predecessor, Boris
Yeltsin, cutting the governments stake
to 41 percent. To develop high-technol-
ogy industries such as armaments and
pharmaceuticals, Putin created Rostec,
a state corporation that encompasses
663 companies employing 900,000 peo-
ple, or 1.2 percent of the entire Russian
workforce. He expanded state-run
banks OAO Sberbank and VTB Group,
whose dominance in retail banking has
weakened foreign rivals such as HSBC
Holdings Plc and Barclays Plc.
Sechin declined requests to be in-
terviewed or to answer written ques-
tions. In a telephone interview on Jan.
20, Putin spokesman Dmitry Peskov
said: Sechin is a believer in the role of
the state in his economic philosophy
while at the same time not excluding
a free-market approach. And he is firm
in pursuing his viewpoint. Of Putins
relationship with Rosneft, Peskov says,
The president cant get involved in the
affairs of a company.
Even as Putin, 61, stages the worlds
most expensive Olympics, the $48 billion
Winter Games in Sochi, to showcase the
glories of present-day Russia, he has
spent his time in office reshaping the
economy to resemble the countrys So-
viet past. Following Rosnefts March
2013 acquisition of TNK-BP, state-owned
enterprises accounted for more than 50
percent of Russias gross domestic prod-
uct, up from 30 percent in 1999, accord-
ing to data published by BNP Paribas SAs
Moscow unit and the European Bank for
Reconstruction and Development, or the
Oil from
Rosnefts
Achinsk refinery
flows through a
state-controlled
pipeline system.
visitors to his Kremlin office noticed an
unusual collection on the bookshelves:
row after row of bound volumes contain-
ing minutes of Communist Party con-
gresses. The record stretched across the
history of the party and its socialist pre-
decessorfrom the first meeting in
March 1898 to the last one in July 1990,
a year and a half before the Soviet Union
collapsed.
Sechin regularly perused the docu-
ments and took notes, says Dmitry
Skarga, who at the time was chief execu-
tive officer of OAO Sovcomflot, Russias
largest shipping company. He was
drinking from this fountain of sacred
knowledge so that Russia could restore
its superpower status and take its rightful
place in the world, Skarga says.
Sechins back-to-the-future fascina-
tion with his countrys communist past is
something he shares with Putin, who,
soon after coming to power in 1999, re-
stored the music (though not the lyrics)
of the Soviet-era national anthem and
later described the collapse of the USSR
as the greatest geopolitical catastrophe of
the 20th century. Sechin himself is an
open admirer of socialist icons such as
Cubas ailing Fidel Castro, the late anti-
U.S. Venezuelan leader Hugo Chavez and
the executed Argentine Marxist Che
Guevara, says Victor Mashendzhinov,
who studied with Sechin at college. As
a young man, Sechin served alongside
Cuban fighters in the Cold War hot spots
of Angola and Mozambique.
Sechin, 53, has put his careful study of
communist-era documents into prac-
tice at state-run OAO Rosneft, the
March 2014 BLOOMBERG MARKETS 41
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EBRD. Russias economy probably grew
1.3 percent last year, Deputy Economy
Minister Andrey Klepach told reporters
on Jan. 15 in Moscow. Thats the slowest
expansion since the 2009 recession. The
ministry projects growth will average 2.5
percent a year through 2030 compared
with 7 percent from 2000 to 2008.
Under Putins rule in Russia, the state
is monopolizing key branches of the
economy, says Anders Aslund, a senior
fellow at the Washington-based Peterson
Institute for International Economics.
Aslund was an economic adviser to Yelt-
sin in the 1990s, when the government
prompted a wave of sell-offs of state as-
sets that put 70 percent of the economy
in private hands. Incredibly, Putin
seems oblivious both to the collapse of
the Soviet Unions economic system and
why it happened, Aslund says. Half of
the economy is controlled by state com-
panies, and that is why the Russian econ-
omy isnt growing.
Such criticism ignores competitive
realities, Peskov says. For example,
in shipbuilding, its absolutely point-
less to carry out privatization, he says.
You can privatize enterprises, but
they wont be competitive; they will
be doomed to failure. So consolidating
the assets under the states wing is the
only way to preserve key sectors of the
economy.
The slowdown in Russia coincides
with widespread malaise in some of the
larger emerging marketsincluding Bra-
zil and India, which along with Russia
and China make up the BRIC countries,
as theyre known. Russia is No. 14 in
BLOOMBERG MARKETS annual ranking of
emerging-markets countries. (See The
Gulf Speeds Ahead, page 30.) Its growth
has decelerated or remained unchanged
every quarter since Putin won a new
term as president in March 2012.
Putin has said Russia stacks up favor-
ably with many European countries on
certain key economic indicators. For ex-
ample, Russias unemployment rate for
November was 5.4 percent compared
with 11.1 percent in the euro zone. The
economy is in much better shape than
in a number of European countries,
SBERBANK
Russias largest lender
PUTIN LINK:
Worked with him at St. Petersburg
mayors office in the 1990s
THE RUSSI AN PRESI DENT MAI NTAI NS A GRI P ON THE ECONOMY
THANKS TO THE PRESENCE OF LOYAL ALLI ES I N THE EXECUTI VE
OFFI CES OF BI G FI RMS THAT ARE OWNED WHOLLY OR
MOSTLY BY THE STATE. GAZPROM, ROSNEFT AND
SBERBANK ARE THE COUNTRYS THREE
LARGEST COMPANI ES BY MARKET CAP.
50%
+
ONE SHARE
ROSTEC
State industrial holding giant
PUTIN LINK:
A neighbor in East Germany when Putin was
a KGB officer there in the 1980s
100% 100%
OAO RUSSIAN RAILWAYS
State monopoly railway operator
PUTIN LINK:
A neighbor of his in an elite dacha
settlement outside St. Petersburg
Sources:
Bloomberg,
company data
Herman
Gref
CEO
Sergey
Chemezov
CEO
Vladimir
Yakunin
CEO
50.002%
GAZPROM
Natural gas
exporter that
supplies a quarter
of the European
market
PUTIN LINK:
Worked with
him at St.
Petersburg
mayors office
in the 1990s
Alexey
Miller
CEO
69.5%
Igor
Sechin
CEO
ROSNEFT
Controls about 40
percent of Russias
crude production
PUTIN LINK:
Worked with
him at St.
Petersburg
mayors office
in the 1990s
PERCENTAGE
OF STATE
CONTROL
42 BLOOMBERG MARKETS March 2014
Peskov says. That is why we dont take
this criticism seriously.
In furthering Putins mission, Sechin is
more than just a loyal underling to the
president, says Khodorkovsky, who ac-
cuses Sechin of orchestrating the de-
struction of Yukos. In December, Putin
showed hes confident enough in the eco-
nomic change hes wrought to free
Khodorkovsky, once Russias richest man
and Putins most powerful rival. Khodor-
kovsky, who was imprisoned in 2003 on
tax evasion and fraud charges and spent
10 years in prison camps, says Sechin
tried to block his release. I dont have
any such information, Peskov says. I
doubt it.
Khodorkovsky also says Sechin has
helped to shape as well as execute Putins
economic policies. Sechin is a real oli-
garch, in the classic meaning of this
word, Khodorkovsky told Bloomberg
News in an interview in Berlin on his
fourth day of freedom. He convinced
Putin that state capitalism is right and is
realizing this idea in practice.
Putin, a one-time KGB colonel, main-
tains his tight grip on the economy by
drawing on Sechin and other members of
his inner circle to ensure that loyal allies
direct the countrys industrial strong-
holds and revenue flows. Sechin, like Pu-
tin, is a St. Petersburg native and worked
for Putin in the 1990s, when the Russian
leader was deputy mayor there. Like
Sechin, Putins favored few are men who
were associated with him before he be-
came president. They include the CEOs
of Gazprom, Sberbank, Rostec and mo-
nopoly rail operator OAO Russian Rail-
ways. Gazprom, Rosneft and Sberbank
are now the countrys three largest com-
panies by market value.
Putin, Sechin and other senior figures
want to ensure that big companies cen-
tral to the economy are in state hands,
says Chris Weafer, a senior partner at
Moscow-based consulting firm Macro
Advisory. They hanker after what they
recall as the stability of the Soviet system,
and part of that is keeping control of so-
called strategic industries, he says.
Despite his relatively low profile
internationally, Sechin looms large at
home. Sechin is easily the most influ-
ential person in the country after Pu-
tin, says Sergei Markov, a political
analyst at and vice rector of the Plekha-
nov Russian University of Economics in
Moscow. Putin trusts him more than
anyone else.
Having Sechin in control at Rosneft
reflects Putins commitment to large
government-run corporations. The
experience of successful economic
modernization of countries such as
South Korea and China shows that
the state has a necessary role to play,
Putin said in a 2012 campaign mani-
festo. Large private capital willingly
doesnt want to go into new areas be-
cause it doesnt want to carry major
risks.
Lately, that private capital has been
flowing away from Russia. Concerns
about Putins treatment of Khodor-
kovsky and what it said about doing busi-
ness in Russia encouraged investors to
pull $420.6 billion out of the country
from 2008 to the end of last year, accord-
ing to the central banka trend the gov-
ernment has said it wants to reverse.
Khodorkovskys release from prison
wont be enough to allay the concerns of
foreign investors, Alexander Kliment and
Yael Levine of Eurasia Group, a political-
risk research firm, said in an e-mailed
commentary on Dec. 19. His release, they
said, was a public relations stunt ahead of
the Sochi Olympics and doesnt mean the
business climate will improve.
The key drag on the economy is
corruption, much of it concentrated in
the state sector, says Elena Panfilova,
head of Berlin-based Transparency In-
ternationals Russia branch. Russia was
ranked the most corrupt nation among
the Group of 20 advanced economies in
the organizations 2013 Corruption Per-
ceptions Index.
Another hindrance is that state-run
companies face no incentive to cut costs
and eliminate waste because nonstate
shareholders are in the minority, says
Mattias Westman, CEO of London-based
WHI LE ROSNEFT
I S THE WORLDS
LARGEST PUBLI CLY
TRADED OI L
COMPANY BY
OUTPUT AND
RESERVES, I T LAGS
BEHI ND EXXON
MOBI L I N REVENUE
AND MARKET VALUE.
Data as of Jan. 13
unless otherwise noted.
1
Third quarter 2013.
2
As of Dec. 31, 2012.
3
As of April 25, 2013.
4
Includes TNK-BP pro
forma data.
Sources: Bloomberg,
company data
ROSNEFT EXXON MOBIL
4. 88
OIL AND GAS OUTPUT
1
(mi l l i on barrel s a day)
4. 02
PROVEN OIL AND GAS RESERVES
2
(bi l l i on barrel s of oi l equi val ent)
29. 6
25. 0
2012 NET PROFIT
PER EMPLOYEE
2012 REVENUE
(i n bi l l i ons)
$159. 2
4
$420.7
TOTAL DEBT
1
(i n bi l l i ons)
$71. 5
$21. 3
EMPLOYEES 235, 827 76, 900
$70, 815 $620, 026
LIFTING COSTS PER BARREL
3
$3.70
$12. 30
MARKET CAP
(i n bi l l i ons)
$76. 6
$430. 5
PRICE-EARNINGS RATIO 5.4
13. 2
50% REDUCTION
IN R&D COSTS
Ontarios R&D incentives
are among the most
generous in the world
26.5% CORPORATE TAX RATE
Ontarios combined provincial/federal
corporate tax rate is lower than the
U.S. federal/state average. Since 2010,
its dropped 5.5 points to 26.5%
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44 BLOOMBERG MARKETS March 2014
times of the late 1990s, Milov says. He
says Bogdanchikov had his own relation-
ship with Putin, though not as close as
Sechins. The pair wrestled over opera-
tional control, and Sechin eventually
forced Bogdanchikovs exit, Milov says.
While serving as Rosneft chairman,
Sechin was also appointed deputy prime
minister with responsibility for the en-
ergy sector in 2008. He held the Rosneft
position until 2011, when government
officials with a potential conflict of in-
terest were required to quit board seats
at state-run companies. He was the most
effective bureaucrat in the government,
says former Central Bank First Deputy
Chairman Sergei Aleksashenko. From
the point of view of bureaucratic man-
agement, he was simply amazing, says
Aleksashenko, now director of macro-
economic research at the Higher School
of Economics in Moscow. He worked
like a machine.
Under Sechin, Rosneft has grown into
a leviathan. From 2010 to 2013, its an-
nual revenue increased 128 percent to
an estimated $143.6 billion, according
to a forecast by 13 analysts surveyed by
Bloomberg. Its oil and gas output of 4.88
million barrels a day as of the end of the
third quarter of 2013 was greater than
Exxon Mobil Corp.s 4.02 million and
PetroChina Co.s 3.8 million; its proven
oil and gas reserves, including TNK-BP,
rose to 29.6 billion barrels at the end of
2012, more than Exxons (25 billion) and
PetroChinas (23 billion).
The company posted an eightfold
rise in third-quarter profit in 2013, af-
ter recording a 167 billion ruble ($4.98
billion) gain on the value of TNK-BP.
Sechin clinched his latest deal on Dec.
20the day of Khodorkovskys release
with the acquisition of Morgan Stanleys
global oil trading and transport busi-
ness for an undisclosed sum. Sechin
also presided over a $270 billion supply
deal signed in June that will make China
Russias largest crude customer during
the coming decade.
Compared with non-state-owned en-
ergy giants such as Exxon, Rosneft is in-
efficient. Even though Rosnefts lifting
coststhe costs of getting oil out of the
groundare less than a third of Exxons,
the Russian companys workforce is less
productive. Net profit per employee at
Rosneft was $70,815 in 2012 versus
$620,026 for Exxon. Rosnefts price-
earnings ratio was 5.4, compared with
Exxons 13.2, as of Jan. 13. Rosneft shares
fell 6.87 percent in 2013, while Exxon
shares rose 16.9 percent during the year.
The main reason to hold Rosneft is the
reserves, Snykov says.
Sechin had no hands-on oil experience
before joining Rosneft as a manager. Ini-
tially, operational control was left to
Bogdanchikov. Still, Sechins resume as
a state bureaucrat served him well, with
his rise neatly trailing his bosss. Born
in what was then called Leningrad, he
attended a school that specialized in
French. His parents, who both worked
at a metallurgical plant, were divorced
when Igor and his sister, Irina, were
young. After finishing secondary school
in 1977, Sechin studied Portuguese at
Leningrad State University. Unlike chil-
dren of well-connected parents, Sechin
was admitted on his own merits, says fel-
low student Mashendzhinov, whos now
CEO of First Media Co., a St. Petersburg
based advertising firm.
Sechin pored over Marxist-Lenin-
ist texts and could cite from memory
biographical details of Communist lead-
ers through the decades, recalls Larisa
Volodimerova, another fellow stu-
dent. He wasnt one to frequent under-
ground rock concerts frowned upon
Prosperity Capital Management, the
largest Russia-focused equity investor,
which manages about $4 billion in Russia
and other former Soviet countries.
Jim ONeill, the former Goldman
Sachs Group Inc. economist who coined
the term BRIC in 2001, says Putins sti-
fling of private enterprise has led to Rus-
sias growth slowdown. Unless they do
undertake reform, thats the future,
ONeill says. (For more of ONeills views,
see Mexico and Nigeria: Its Their Turn,
page 50.)
Kingsmill Bond, chief strategist at
Sberbank CIB, an investment arm of
Russias biggest lender, says some inves-
tors and commentators hold Russia and
China to different standards on trans-
parency and human rights issues. With
Russia trailing behind Chinas 7.7 per-
cent growth in 2013, Bond says, it would
be fair to say that Russian capitalism is
judged more assiduously than that in
China.
Largely thanks to Rosneft and Gaz-
prom, Russia (population: 143 million) is
the worlds largest energy exporter by
barrels of oil equivalent a day and the big-
gest crude producer after Saudi Arabia.
The government receives about half of its
budget revenue from oil and gas exports.
The EBRD said in December 2012 that
Russia was becoming perilously depen-
dent on commodities and failing to pre-
pare for falling oil output in 20 years. Lev
Snykov, a partner at Greenwich Capital
in Moscow, says the price of crude needs
to be at $120 a barrel or higher for the
government to be able to balance the
budget. Brent crude fell to $106.75 on
Jan. 13.
When Sechin became CEO of Rosneft,
he had already been deeply involved in
the company. As chairman beginning in
2004, he had a decisive say in strategic
decisions because of his unrivaled access
to Putin, according to Vladimir Milov,
who was deputy energy minister in 2002.
As a boss, Sechin displayed a ruthless
streak, Milov says.In 2010, he initiated
the sacking of CEO Sergei Bogdanchikov,
a lifelong oilman who had kept Rosneft
afloat through the volatile economic
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by the authorities, says Volodimerova,
now a human rights activist who lives in
Amsterdam.
After graduating in 1984 with a Ph.D. in
economics and being fluent in Portu-
guese and French, Sechin joined the So-
viet Army and served as a translator in
Portuguese-speaking Mozambique and
Angola, where Soviet- and U.S.-backed
factions competed for dominance during
the final decades of the Cold War. A trip
to a hot spot was seen as a good career
move then, Mashendzhinov says.
In Angola, where Soviet officers served
as advisers to Angolan insurgents and
Cubans fighting at their side, Sechins
friendships led to an affinity with Cas-
tros island bastion of communism. One
day, Sechin witnessed at close hand the
death of a Cuban pilot whose plane was
shot down by Angolan rebels, according
to Anatoly Kolomnin, deputy head of the
Moscow-based Union of Veterans of An-
gola. In Cuba about three years ago,
Sechin sought out the pilots widow and
son, Kolomnin says. He brought the son
to Russia for his university studies,
Kolomnin says.
What turned out to be Sechins best ca-
reer move of all came in 1988, when he
went to work at St. Petersburgs city hall,
where he became acquainted with Putin.
In 1994, when filmmaker Igor Shadkhan
came to interview Putin, then a newly ap-
pointed deputy mayor, he was surprised
to see Sechin in the reception area of Pu-
tins office. Shadkhan says Sechin was the
only male secretary in sight, recording
the names and details of all visitors in
a thick, black notebook. Putin chose
Sechin because he wasnt talkative and
can be trusted with any information,
Shadkhan says.
When Putin went to Moscow in 1996
to work as a senior Kremlin official un-
der Yeltsin, Sechin followed as a lower-
ranking bureaucrat in the presidential
administration. When Putin became
president in 2000, Sechin spent eight
years as his deputy chief of staff. Con-
stitutionally barred from serving more
than two consecutive terms as presi-
dent, Putin bided his time for four years
takeover, says Temerko, who now runs
a London-based business selling North
Sea oil platforms. Sechin was the main
ideologue and driver behind the Yu-
kos case, Temerko says. He was inti-
mately involved in the process from start
to finish. Putin spokesman Peskov says
theres no truth to these allegations.
The government subsequently dis-
mantled Yukos. Most of the companys
assets eventually ended up in Rosnefts
possession. That was always Putins end-
game, says Misamore, who as a former
director of Yukos helps run two Dutch
foundations that hold Yukoss overseas
assets. His philosophy was, private
ownership of the commanding heights
of the economy is not acceptable, Misa-
more says. He wanted to take it back to
the Soviet Union.
In acquiring first Yukos and then TNK-
BP from BP and its billionaire partners in
March 2013, Rosneft gained control of
companies that had pioneered the use of
Western technology and management in
Russia. Yukos hired foreign executives
such as Misamore, who made it the first
Russian company to switch to quarterly
financial reporting under U.S. accounting
standards. Yukos also introduced new
drilling techniques to bolster crude out-
put, which had been in decline during
most of the 1990s.
BP set up TNK-BP in 2003 with Pu-
tins blessing. While the new company
paid $19 billion in dividends to BP from
its inception, according to BPs 2012
annual report, infighting between the
Russian and U.K. partners eventually
led to last years takeover. Under that
deal, BP has a 19.75 percent stake in
Rosneft and BP CEO Bob Dudley occu-
pies one of two seats BP will eventually
be entitled to on Rosnefts nine-per-
son board of directors. Former Exxon
Senior Vice President Donald Hum-
phreys and former Morgan Stanley
CEO John Mack are among the four in-
dependent board members.
TNK-BP increased production by
more than 40 percent during the nine
years before Rosneft bought it. The con-
cern is, will Rosneft be able to achieve
In December, Putin freed former Yukos Oil CEO
Khodorkovsky, once Russias richest man.
as prime minister and installed Sechin
as deputy prime minister while Dmitry
Medvedev sat in as head of state. When
Putin reclaimed the presidency in 2012,
he appointed Sechin as CEO of Rosneft.
ExSovcomflot boss Skarga says that
even after 2000, no one took Sechin seri-
ously, seeing him merely as Putins loyal
sidekick. Yet within a few years, accord-
ing to Khodorkovsky, Sechin confounded
his rivals by masterminding the attack on
Yukos in 2003 to 2004. After Khodor-
kovsky was arrested by armed police at
gunpoint in a corporate jet in Siberia in
October 2003, Yukos was eventually
driven to bankruptcy, owing the govern-
ment $26.6 billion, according to Claire
Davidson, a spokeswoman for the former
management.
With Khodorkovsky sidelined,
Sechin personally launched takeover
talks with Yukos Vice President Alex-
ander Temerko in the summer of 2004,
says Bruce Misamore, Yukoss Ohio-born
chief financial officer at the time. The
Kremlin wanted to imprison Yukos ex-
ecutives so that they couldnt prevent the
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48 BLOOMBERG MARKETS March 2014
S
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have any billions, he says. What Sechin
does have, Skarga says, is power.
He will have it as long as Putin does,
says Masha Lipman, an analyst at the
Carnegie Moscow Center. Putin has
been in power for 14 years. Under a 2008
amendment to the constitution that al-
lows presidents to serve two consecutive
six-year terms, Putin could remain as
president until 2024, when he would be
72 years old. Though politically stricken
by economic stagnation, Putin is likely
to stand for re-election in 2018, says An-
drew Monaghan, a senior research fel-
low at Chatham House, a London-based
research center. Putins leadership cur-
rently looks steady and sturdy enough to
last until the next election, he says.
Sechin looks well set, too. He now has
his eyes on a post-communist break-
through: In a Jan. 9 research note, Sber-
bank said Russian oil output will probably
approach the Soviet-era peak of 11.4 mil-
lion barrels a day by 2016 or 2017. It
would be a very big psychological mile-
stone for Russia to get back to the Soviet-
era peak production, says Julian Lee,
a senior analyst at the London-based
Centre for Global Energy Studies. It
would be a boost, too, for the former city
hall secretary whose study of the Soviet
communist past has positioned him to
play a leading role in shaping Russias
economic future.
IRINA REZNIK COVERS COMPANIES AND POLITICS
AT BLOOMBERG NEWS IN MOSCOW.
[email protected] STEPHEN BIERMAN
COVERS OIL IN MOSCOW.
[email protected] HENRY MEYER
COVERS POLITICS IN MOSCOW.
[email protected] WITH ASSISTANCE
FROM ILYA ARKHIPOV IN MOSCOW AND ANATOLY
KURMANAEV IN CARACAS.
died last March. Sechin, who sported
a Chavez-emblazoned T-shirt during
a trip to Venezuela in 2012 and headed
the Russian delegation to the leaders
funeral, said last year that the country
is our No. 1 priority. At a ceremony to
mark the naming of a Moscow street
in Chavezs memory, Sechin read from
the patriotic poetry of Vladimir May-
akovsky, a Soviet revolutionary poet.
Chavez always told us that if you need
to sort out an issue with Russia, you go
to Sechin, Diosdado Cabello, president
of the National Assembly, told report-
ers before meeting Sechin in Moscow
last October. Hes the go-to man.
Sechin is the go-to man at home as
well, former Sovcomflot head Skarga
says. The richer Rosneft becomes, the
more his influence grows, he says. Un-
like those Russians who accumulated
vast wealth during the privatization of
state industries, Sechin isnt preoccupied
with money, Skarga says. He doesnt
that same level of operating efficiency as
TNK-BP did before it was acquired? says
Rob West, an oil analyst at Sanford C.
Bernstein & Co. in London. That really
is the big question.
Rosneft managed to increase crude
production by an annual average of more
than 3.5 percent from 2009 to 2012.
While that looks faster than TNK-BPs
annual 1.5 percent rise over the period,
West says thats largely because strong
government ties have given it access to
new resources such as the Vankor field in
Siberiathe biggest oil find in Russia in
25 yearswhich started pumping oil in
2009 and now accounts for almost 10
percent of Rosnefts production.
Rosneft is also shouldering huge debts,
says Tatiana Mitrova, head of the oil and
gas department at the Energy Research
Institute of the Russian Academy of Sci-
ences. Following the TNK-BP deal, the
companys indebtedness more than dou-
bled to $72 billion. To ease financial pres-
sures, Rosneft has drawn down the first
tranche of up to $70 billion in advance
payments from China National Petro-
leum Corp. in exchange for supplies, ac-
cording to a Jan. 15 Rosneft statement. In
October, Rosneft separately signed a pro-
visional $85 billion agreement to supply
China Petrochemical Corp. with 100 mil-
lion metric tons of crude over 10 years.
While any advance payments from that
deal could provide a cash lifeline, the
agreement may also restrict Rosnefts
ability to supply other customers at po-
tentially higher prices, West says.
Rosneft, together with other Rus-
sian oil producers, is investing $13 bil-
lion in Venezuela in partnership with
state-owned monopoly Petroleos de
Venezuela SA. Rosneft wasnt put off
by PDVSAs questionable performance.
Even as proven reserves almost qua-
drupled from 1999, when Chavez be-
came president, to 2012, the countrys
crude output declined about 13 percent
to 2.7 million barrels a day, according to
the BP Statistical Review of World En-
ergy 2013.
Sechin has demonstrated a soft spot
for Venezuela and for Chavez, who
EXPLORING ROSNEFT Bloomberg Tps
Sechin, right, shares with Putin a fascination with
Russias seven decades of Communist Party rule.
Hat
trick
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Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. Registered trademark of Bank of Montreal in the United States and Canada. TYPE BMO <GO>
50 BLOOMBERG MARKETS March 2014
emerging
markets needs a rethink. Eight coun-
tries that today are grouped under
this rubric rank in the worlds top 20
largest economies, each accounting
for at least 1 percent of global output.
They are Brazil, Russia, India and
China, for which I coined the name
BRICs more than a decade ago, plus
South Korea, Mexico, Indonesia and
Turkey. Theyre systemically impor-
tant enough to be part of the Group of
20, the core group of nations that
meet annually to try to solve the
worlds economic problems.
Is South Korea really justified as
being part of the emerging markets?
Per capita wealth there isnt far off
RUSSI A
2.6%
5.5%
7.2%
Median economist forecast. Source: Bloomberg
The pace of expansion in the MINT nations
Mexico, Indonesia, Nigeria and Turkeywill rival
that of the better-known BRICs in coming years,
according to economist forecasts.
2015 GDP GROWTH
8%
7
6
5
4
3
2
1
0
TURKEY
4.4%
I NDONESI A MEXI CO
3.9%
6.0%
NI GERI A
7.1%
CHI NA I NDI A
2.7%
BRAZI L
March 2014 BLOOMBERG MARKETS 51
P
I
U
S
U
T
O
M
I
E
K
P
E
I
/
A
F
P
/
G
E
T
T
Y
I
M
A
G
E
S
(
2
)
the level in Spain and is above that of
euro-zone countries such as Greece
and Portugal. (Index publisher MSCI
Inc. in November moved Greece from
the developed-economies group to its
emerging-markets list, and its weigh-
ing whether to move South Korea in
the other direction.)
What about China? Its size, ambi-
tion and global economic reach give
the country a unique role. Some
among the big emerging economies
are commodities producers, such as
Brazil and Russia, while several are
more raw-materials consumersfor
example, South Korea, India and Tur-
key. The forces that these countries
face are sufficiently diverse that
grouping them together for any as-
sessment of economic or investment
outlook is probably an error.
So whats the right way to proceed?
Give each country its due. There are a
lot of opportunities out there. In re-
cent months, Ive focused on a new
group beyond the BRICs, namely
Mexico, Indonesia, Nigeria and Tur-
key, and Im using a new acronym for
them: MINTs. All four have not only
large populations but also very favor-
able demographic dynamics. Each is
set to see its working population rise
relative to overall population, which
is usually a good recipe for growth.
I spent the fourth quarter of 2013
traveling through the MINT countries,
working on a British Broadcasting
Corp. radio documentary. I returned
to London with a particular fond-
ness for both Mexico and Nigeria, al-
though Indonesia and Turkey have
some positive stories, too.
The reforms being undertaken in
Mexico are broad and deep, spanning
fiscal policy, energy, education and
governance. If one were to compare
them with the changes to the U.K.
economy in the 1980s under Margaret
Thatcher, one might conclude that
the Iron Lady was a pussycat. And
Mexico is regaining a competitive
edge as Chinas leaders orient their
economy more toward domestic
consumption. Manufacturers such as
Volkswagen AG, which operates
North Americas biggest automobile
plant in Puebla, are expanding in the
country. The next decade in Mexico
should be much better than the previ-
ous one.
Nigeria is remarkable not least be-
cause it has more than 15 percent of
the entire African continents popula-
tion. If the country stays together, it
will likely have more people than the
U.S. by 2050. The ingenuity and cre-
ativity of many Nigerians is more
akin to what one might expect to find
in the U.S. or another developed econ-
omy rather than in an emerging one.
Their desire to harness modern tech-
nologies might allow Nigeria to leap
through many stages of development
more quickly than other countries.
With a bit better governance, Nige-
ria could really go places. Sub-Saha-
ran Africa generally seems on the cusp
of significant progress. The story in
this region at this time has more to
do with improving leadership and
the application of the best technol-
ogies than it does with commodities
demand.
I visited Turkey in October, after
the protests in Istanbuls Gezi Park
but before Decembers corruption ar-
rests that have rocked Prime Minister
Recep Tayyip Erdogans government.
There were hints that all wasnt well,
not least of which was the reluctance
of many officials to be interviewed by
a foreign news organization. (In the
other three MINT countries, senior
policy makers were very willing to
participate in our documentary.)
The ingenuity and
creativity of
Nigerians is more
akin to what one
might expect
in a developed
economy.
T
H
O
M
A
S
T
R
U
T
S
C
H
E
L
/
G
E
T
T
Y
I
M
A
G
E
S
52 BLOOMBERG MARKETS March 2014
Concerns about corruption and the
governments construction program
cast considerable doubt over the
near-term outlook for Turkey, espe-
cially as the country needs lots of for-
eign capital to fund its current-account
deficit.
All this said, however, Turkey has
really big advantages that will persist.
It has a youthful and expanding work-
force and a unique geographic spot,
connecting Europe, the Middle East
and Central Asia. And, of course, it
bridges the Muslim world and West-
ern capitalism. No leader keeps
power forever, and at some point, the
issues roiling Turkish politics and
economics will be history.
Indonesia also faces a current-
account deficit, and it has parliamen-
tary elections in April and a presiden-
tial vote in July, in which incumbent
Susilo Bambang Yudhoyono is barred
from running because of term limits.
If the country moves in a positive di-
rection, growth will be quite strong,
given its demographic trends and ur-
banization. Still, I finished my visit in
Jakarta more uncertain about the
outlook for Indonesia than the rest of
the MINT group. Yes, the country has
more than 240 million people, but as
I kept asking during my visit, where is
its edge? Where is its Samsung? Or, to
contrast it with Turkey, where is its
Turkish Airlines or its Beko, a fast-
growing brand of appliances?
All of which is not to say that the
BRIC nations should be forgotten. I
continue to be quite bullish about
China, especially what I would call the
new China. Policy makers seem ea-
ger to boost the quality of the nations
growth rate and less interested in the
quantity of growth for its own sake.
This suggests that there are good
places to invest in China, such as alter-
native energy, creative and knowl-
edge-based industries and businesses
involved in the broad consumer devel-
opmentnot luxury goods but what
might be called luxury lite. It will be
best to avoid companies dependent
upon low-value-added exports and
commodities, as well as the largest fi-
nancial firms, because new entrants
are both allowed and encouraged to
bring more diversity to the sector.
People lately say China has been a
disappointing investment destina-
tion, but Im not sure thats true. In-
vesting in the Shanghai stock market
was a money loser in 2013, but that
index is dominated by companies that
represent the old China. The Shen-
zhen index, weighted more to smaller
companies and much less to the big-
gest state-owned enterprises, man-
aged a rise of 20 percent.
China doesnt yet have anything
like the wealth of a South Korea, but
its rise is so important to the world
that we probably shouldnt consider
China as being in any way a typical
emerging market. Its nominal gross
domestic product will have surpassed
$9 trillion in 2013, and if it grows by
7.5 percent or thereabouts, China will
be contributing more than $1 trillion
a year to global GDP growth. Thats
equivalent to what the U.S. would
provide if it were growing by 4 per-
cent annuallyor Italy if it were
growing 50 percent a year. Even com-
parisons with the other BRIC econo-
mies probably arent entirely fair,
given that Chinas growth is equiva-
lent to the creation of another Brazil,
Russia or India about every two years.
Its hard to overestimate the im-
portance of China to global growth,
even as the emerging-markets label
begins to seem an odd fit. And yet in-
vestors may be rewarded most if they
focus on the fundamentals of specific
countries such as Mexico and Nigeria.
Theyre truly poised to emerge.
JIM ONEILL IS A COLUMNIST FOR BLOOMBERG
VIEW IN LONDON, A VISITING RESEARCH FELLOW
AT BRUEGEL AND A FORMER GOLDMAN SACHS
ECONOMIST. THE OPINIONS EXPRESSED ARE
HIS OWN. [email protected]
Manufacturers such as
Volkswagen, with its plant in
Puebla, are expanding in Mexico.
Follow us @Vanguard_FA for important insights, news, and education.
All investing is subject to risk, including possible loss of principal. Diversication does not ensure a prot or protect against a loss.
Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of
currency uctuations. These risks are especially high in emerging markets.
For more information about Vanguard ETF Shares, visit advisors.vanguard.com/VWO, call 800 652-8474, or contact your broker
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prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead,
investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing
so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive
less than net asset value when selling.
*Source: Morningstar, Inc., as of 3/1/2013. Based on 2013 industry average expense ratio for emerging markets ETFs of 0.55% and
Vanguard VWO expense ratio of 0.18%.
All rights in the FTSE Emerging Transition Index (the Index) vest in FTSE International Limited (FTSE). FTSE
is a trademark
of London Stock Exchange Group companies and is used by FTSE under license. The Vanguard FTSE Emerging Markets ETF (the
Product) has been developed solely by Vanguard. The Index is calculated by FTSE or its agent. FTSE and its licensors are not
connected to and do not sponsor, advise, recommend, endorse, or promote the Product and do not accept any liability whatsoever
to any person arising out of (a) the use of, reliance on, or any error in the Index or (b) investment in or operation of the Product.
FTSE makes no claim, prediction, warranty, or representation either as to the results to be obtained from the Product or the
suitability of the Index for the purpose to which it is being put by Vanguard.
2014 The Vanguard Group, Inc. All rights reserved. U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and
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These days, understanding the advantages of tapping into emerging
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can help your clients diversify by exposing them to companies in more
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ALPS Distributors, Inc., a registered broker-dealer, is distributor for SPDR S&P 500 ETF Trust, a unit investment trust.
IBG-9400
WAS YOUR LAST INVESTMENT DESIGNED WITH
THE SAME METICULOUS ATTENTION TO DETAIL?
TYPE SPDR <GO>
MERGERS AND ACQUISITIONS DELIVERED
an average premium of more than 30 percent to
shareholders of target firms last year. While
holders of the companies profited by owning the
shares before the deals were announced, inves-
tors using risk arbitrage strategies can also win
by betting on whether such transactions will
eventually succeed or fail.
Wagers on deal completion can provide a cush-
ion for investors in bearish markets and generate
returns that dont depend on broader market
movements. The M&A Arbitrage (MARB) func-
tion on the Bloomberg Professional service can
help you pursue this strategy by showing pend-
ing offers and terms, as well as breaking news
about the companies involved.
Type MARB <Go>. The function lets you create
templates for M&A monitors and customize
their metrics. Click on a deal to view news on the
Proting From Deals
You can use Bloombergs M&A-monitoring tool
to track arbitrage opportunities.
BY ERIC ROSEMAN
related companies, to see details of the offer or to
chart the prices and premiums over time. The
Current Premium in % column shows how a
takeover bid relates to a targets stock price and
is a key metric in M&A analysis. A negative value,
which occurs when the shares are trading above
the offer price, is a sign that the bid may eventu-
ally be raised. If the current premium crosses
over to positive territory, it may indicate skepti-
cism that the offer will succeed. To show first
those deals that the market has priced furthest
from completion, use MARB to sort the premi-
ums from highest to lowest.
Targets of M&A offers typically appreciate
after the deal is announced, while the buyers
shares usually decline. An investor could wager
against the success of a deal by buying the stock
of the acquirer and selling short the target.
THE DUELING BIDS BETWEEN MENS WEAR-
house Inc. and Jos. A. Bank Clothiers Inc. show
how to use the current premium as a barometer
for a deals expected success. After rebuffing a
buyout offer from its smaller rival, Mens Wear-
house offered to purchase Jos. A. Bank on Nov.
26 for $55 a share, an 8.7 percent premium over
the previous days closing price of $50.60.
Jos. A. Bank rejected the offer, and Mens
Wearhouse raised its bid to $57.50 on Jan. 6. That
was still a 1.64 percent premium to Jos. A. Banks
stock as of Jan. 13, signaling remaining doubt
among some investors that the offer would bring
the two retailers together.
ERIC ROSEMAN IS ON THE STAFF OF THE ANALYTICS
DEPARTMENT AT BLOOMBERG IN NEW YORK.
[email protected]
Type MARB
<Go> for
a dashboard
of pending deals.
STRATEGIES
EQUITIES
March 2014 BLOOMBERG MARKETS 93
STRATEGIES
94
LOW-VOLATILITY EQUITY STRATEGIES
investment approaches that focus on stocks
whose prices swing less than othershave at-
tracted interest from many investors during the
past few years. The oldest exchange-traded fund
based on such a strategythe PowerShares S&P
500 Low Volatility Portfolio, which was started in
2011had $4 billion in assets as of Jan. 13.
The attraction of such strategies lies in their
lower realized volatility combined with a return
that matches or beats traditional market-capital-
ization-weighted indexes. Such strategies arent
entirely new. Part of Warren Buffetts success may
be explained by his bets on low-volatility, boring
stocks, according to a recent academic paper.
The Portfolio & Risk Analytics (PORT) function
lets you build low-risk portfolios. You can base
such a strategy on a capitalization-weighted index
that you have access to on the Bloomberg Profes-
sional service or on your own list of stocks.
Lets create a strategy, for example, based on an
ETF that tracks an emerging-markets index. Type
VWO US <Equity> PORT <Go> to load the Vanguard
FTSE Emerging Markets ETF in PORT. Click on
the Tracking Error tab and then on the Summary
subtab. Click on the arrow to the right of Model, se-
lect Bloomberg Risk Model (Global) and press <Go>.
The annualized one-year volatility forecast by the
PORT risk model was 14.9 percent as of Jan. 13.
Lets see how much we can reduce that risk using
optimization. Click on the Trade Simulation button
on the red tool bar and select Launch Optimizer. If
youre using the optimizer for the first time, PORT
will display a window that offers a menu of tasks and
a link to a user guide. Click on Close.
LETS START WITH A READY-MADE TASK.
Click on Tasks, select Predefined Tasks and click
on Reduce Risk: Minimize Risk With 20% Turn-
over. To specify an optimization, you need to de-
fine four components of the process: your goals,
the universe of securities you can trade, con-
straints and security properties. Lets change the
goal to minimizing portfolio total risk. In the Goals
section of the screen, click on the pencil icon. Click
on the plus sign to the left of Risk to expand the list.
Click on the plus sign to the left of Risk (Ex Ante).
Scroll down and click on Portfolio Total Risk. A de-
scription of the data itemwhich calculates the
predicted volatility of the portfolios returnsis
displayed to the right. Click on Select.
We want the optimizer to re-weight the securi-
ties in the portfolio to achieve the goal. So in the
Trade Universes section, under Security List, we
can use the setting of Current Portfolio.
The next step is to define portfolio- and
Lowering Volatility
You can use the optimizer in PORT to build and backtest a reduced-risk equity
strategy based on an index or other list of stocks.
BY NICK BATURIN
94 BLOOMBERG MARKETS March 2014
PORTFOLIOS
Type PORT <Go> and click on the Tracking Error tab to display
model-predicted, one-year volatility for a selected portfolio.
TIP BOX
Type DOCS
#2066156
<Go> 1
<Go> for
a user guide
to the PORT
optimizer.
reduced forecast risk to 8.5 percent from 14.9 per-
cent. The portfolio was somewhat levered, with a 163
percent long weight and 63 percent short weight.
Now that weve seen that we can reduce the
risk of the current portfolio, lets run a backtest
in which we rebalance the portfolio over time,
minimizing risk at each rebalance date. Click on
the box to the left of Backtest so that a check
mark appears. In the Backtest Settings window,
click on the arrow to the right of Rebalance Fre-
quency and select Monthly. To test five years of
data, set the date range to 60 Months from Last
Month End. In the field to the right of Create
New Portfolio, enter a name. Click on Save and
then on the Run Backtest button.
The PORT system will start your backtest and
alert you with a Bloomberg message. Youll get an-
other message when its complete. Click on the at-
tachment to load the backtested portfolio into
PORT. Click on the Performance tab and on the To-
tal Return subtab if it isnt already selected. Click
on the arrow to the right of Time, select Maximum
Range and press <Go>. During the five years ended
on Jan. 13, the optimized portfolio returned a total
of 175 percent, while the ETF returned 95 percent.
Importantly, the ride was a lot smoother, too.
In addition, the risk statistics all look much bet-
ter. To display them, click on the Statistical Sum-
mary subtab. The realized volatility during the
past five years was lower: 14 percent versus 23 per-
cent. That gave the optimized portfolio a Sharpe
ratio of 2.36. By comparison, the ETFs ratio of ex-
cess return to volatility was 0.98.
NICK BATURIN IS THE HEAD OF PORTFOLIO & RISK ANALYTICS
RESEARCH AT BLOOMBERG IN NEW YORK.
[email protected]
security-level constraints.
We dont need the turn-
over constraint. Click on Turnover under
Constraint Field and then on the gray De-
lete button. Lets allow both long and short
positions in the optimized portfolio. In the
Security Properties section, click on the ar-
row to the right of Long Positions Only and
select Long/Short Positions. Lets allow up
to 100 percent short exposure and up to
200 percent long. Enter 200 in the MAX
field to the right of Long.
The ETF may hold some bonds that we
dont want to use in the optimization. To
avoid them, click on the Add Constraint
button. Click on the plus sign to the left of Weight
and then on Weight to select it. On the right side
of the screen, click on the plus sign to the left of
Bucket and then on the plus sign to the left of As-
set Class. Click on the plus sign to the left of Asset
Type and then on Fixed Income to select it. Enter
0 in the MIN field and 0 in the MAX field. Click on
the arrow to the right of Aggregation, select Gross
Value and press <Go>. Click on Add Constraint.
NOW, LETS SET THE CASH POSITION TO
zero. Enter 0 in the MAX field to the right of
Cash (USD Curncy). In addition, lets limit the
minimum weight for any given security to minus
30 percent and the maximum to 30 percent.
Click on the arrow to the right of Init. Portfolio
and select None. Enter 30 in the MIN WGT(%)
field and 30 in the MAX WGT(%) field. Click on
the Run button on the red tool bar.
As of Jan. 13, the optimizer created a portfolio that
March 2014 BLOOMBERG MARKETS 95
After you load the
backtested portfolio
into PORT, the
Performance tab lets
you track the results.
In the optimizer, set the goal to minimize portfolio total risk, add
your constraints and click on the Run button on the red tool bar.
REDUCED RISK
The optimization here
cut the predicted
volatility by almost half.
COMPILED BY ROCKY SWIFT [email protected]
Pacific Investment Management Co. had record
redemptions in 2013 in its $237 billion Total Re-
turn Fund, which trailed 65 percent of peers and
fell 1.9 percent for its biggest annual loss since
1994. The Barclays U.S. Aggregate Index, a
benchmark for bond funds, declined 2 percent as
the U.S. Federal Reserve signaled a tapering of its
stimulus, while the Standard & Poors 500 Index
of stocks surged 30 percent, prompting investors
to flee traditional bond funds. Investors in 2013
pulled $41.1 billion from the Total Return Fund,
causing it to surrender its position as the worlds
largest mutual fund to the Vanguard Total Stock
Market Index Fund. Pimco was hurt by wrong-
way bets on U.S. Treasuries, inflation-linked
bonds and Brazils currency. The firm concluded
at its annual investment forum in May that the
U.S. had not reached escape velocity and that
growth over the next three to five years would av-
erage not much more than 2 percent a year. What
it didnt anticipate was that Fed Chairman Ben S.
Bernanke would raise the possibility that the cen-
tral bank might scale back its bond-buying pro-
gram if the economy picked up. Douglas Hodge,
Pimcos chief operating officer, in a December in-
terview called the taper a five-letter word and
said the firms holdings in longer-dated bonds
ahead of the central bank move cost us.
Taper Trouble
Lira Rally Seen
After Scandal
A corruption scandal pushed Turkeys currency
to its most oversold level in a decade. The liras
relative strength index climbed to a 10-year high
of 74 in early January, measured on a quarterly
basis, signaling a turnaround might be imminent,
according to data compiled by Bloomberg. The
slide worsened as the sons of three ministers and
the head of a state-run lender were arrested in
December amid a corruption probe. The central
bank pledged to buy at least $6 billion of the
liras to prop it up, while the currency slid to
2.1948 per U.S. dollar on Jan. 6, its weakest to that
point since at least 1981. Most of the move in the
lira has run its course, and its now attractive,
according to Benoit Anne, the head of emerging-
markets strategy at Societe Generale SA in London.
The central bank cannot afford a currency crisis
on top of a political crisis, he says. For the original
story, type NSN MYU67N6KLVRB <Go>.
TAPER TIMING
Pimcos Total Return
Fund underperformed
from May through
December.
TIP BOX
Type NI
INFLUENTIAL
<Go> for daily
roundups of
exclusive
market-moving
stories.
Type FXFC <Go> to nd analyst forecasts for the
Turkish lira and other currencies. Right click on a
forecast and select GP Historical Graph to see
how it has changed over time.
FORECASTING CURRENCIES
STRATEGIES
96 BLOOMBERG MARKETS March 2014
INFLUENTIAL NEWS
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STRATEGIES
98 BLOOMBERG MARKETS 98 March 2014
PRIVATE EQUITY
INITIAL PUBLIC OFFERINGS WERE THE
most popular method for private-equity firms in
Europe and North America to cash out of their in-
vestments in 2013. By contrast, exits via second-
ary buyouts and sales to strategic buyers last year
were 30 percent below 2011 levels. Because selling
a stake in a public offering typically exposes the
private-equity firm to market fluctuations for a pe-
riod after the listing, the spike in the use of this exit
strategy suggests firms are increasingly bullish.
You can use the Equity Offerings (IPO) function
to track private-equity exits and keep tabs on mar-
ket sentiment. In addition, new private-equity
functionality lets you dig deeper to identify the
specific funds that back a particular company and
find other holdings that may be ripe for exits.
To create a search that lets you track private-
equity exits via IPOs or additional offerings, type
IPO <Go> and click on the Custom Search button
Exit Signs
You can use IPO to analyze trends in offerings by private-equity-backed companies,
and new functionality lets you dig into details of buyout funds holdings.
BY ANITA KHALILI AND ALICIA LOONEY
on the red tool bar. To set a period you want to
track, click on Date Range on the left side of the
screen. Click on the arrow to the right of Date
Range and select Last 12 Months, for example.
Click on the box to the left of Effective Date so
that a check mark appears and then click on Up-
date. Next, click on Offer Type. To track all private-
equity and venture-capital exits, click on the box to
the left of Private Equity Exit to select it and then
do the same for Venture Capital Exit. Click on
Update and then on Result to display an
overview of the past years private-equity
and venture-capital exits.
TO CHART TRENDS, CLICK ON THE TIME
Series tab. To add a line plotting the number of
deals, click on the box to the left of Deal Count.
Click on the Deal List tab. In 2013, one of the
largest private-equity-backed IPOs was Mer-
lin Entertainments Plcs. Click on the Merlin
deal to display details. The London-based
owner of Madame Tussauds wax museums
sold 303.8 million shares, valued at 957 million
pounds ($1.6 billion). Click on the Sharehold-
ers tab and you can see that Blackstone Group
LP, the worlds largest manager of alternative
assets, sold 76 million shares in the offering.
To dig deeper and see which specific Blackstone
fund sold shares and the history of the investment,
first type BX US <Equity> PHD <Go> to display New
Yorkbased Blackstones portfolio holdings. Tab in
to the field under Portfolio Company, enter MER-
LIN, press <Go> and click on Merlin Entertain-
ments. The All Related Transactions section of the
window shows that the fundBlackstone Capi-
tal Partners IV LPfirst acquired its stake in the
A search in IPO shows private-equity exits climbed last year.
TIP BOX
Type PE <Go>
1 <Go> for a
menu of private-
equity-related
functions,
news and data.
March 2014 BLOOMBERG MARKETS 99
BY NICK TABOREK
Click on Merlin
in Blackstones
list of holdings
for details. company in 2005. Click on that acquisition to dis-
play details of the funds takeover of the company
for 102.5 million from Hermes Private Equity Ltd.
For a description of the Blackstone fund, type
PEF1163 US <Equity> DES <Go>. The Financials
section of the screen shows that the 2003-vintage
private-equity fund is in Harvesting status. The
$6.5 billion fund made 24 investments, seven of
which are still active. In the Performance section
of the screen, you can see that the fund had a 30.6
percent net internal rate of return. Move your
mouse over the figure and you can see the source
of the information: Fresno County Employees
Retirement Association. The return ranked the
Blackstone vehicle in the first quartile among all
other 2003 buyout funds based on Bloombergs
quartile benchmarking. Type 3 <Go> to view de-
tails of the funds remaining investments.
ANITA KHALILI IS ON THE STAFF OF THE DATA MANAGEMENT
DEPARTMENT AT BLOOMBERG IN LONDON.
[email protected] ALICIA LOONEY IS ON
THE STAFF OF THE DATA MANAGEMENT DEPARTMENT
IN NEW YORK. [email protected]
AEROSPACE SOARS ABOVE S&P PEERS
1 AEROSPACE & DEFENSE 3.8% 14.3 54.9%
2 LIFE SCIENCES 3.6 14.8 52.9
3 MEDIA 3.4 14.8 50.4
AUTOMOBILES 3.4 19.5 65.4
5 AIRLINES 3.3 21.9 72.7
RISK-
ADJUSTED
RETURN VOLATILITY
TOTAL
RETURN
Figures are for 2013. The risk-adjusted return, which isnt annualized, is calculated by dividing total return by
volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A lower volatility
means the price of an asset doesnt swing dramatically during a specified period, reducing the potential for
unexpected losses. Source: Bloomberg
Best Defense
A RALLY IN WEAPONS MAKERS SUCH AS
Northrop Grumman Corp. and Lockheed Martin
Corp. made aerospace companies the best-
performing sector among U.S. stocks last year,
even under the cloud of cutbacks in government
spending. The industry returned 3.8 percent in
2013 after adjusting for volatility, the Bloomberg
Riskless Return ranking shows, the most among
68 groups in the Standard & Poors 500 Index.
Northrop led gains in the sector, with a risk-ad-
justed gain of 4.6 percent and volatility that was
lower than the average for producers of military
and commercial aircraft. While U.S. lawmakers
reduced spending amid troop withdrawals from
Afghanistan and Iraq, defense companies re-
sponded by cutting staff and using cash stockpiles
to boost shareholder payouts. The top five U.S.
weapons makers, a group that also includes Boe-
ing Co., General Dynamics Corp. and Raytheon
Co., raised their earnings forecasts in October as
cost savings helped boost profit margins.
Investors took advantage of cheap valuations
to put money into the sector. Northrop, Lockheed
and Raytheon saw their shares surge at least 57
percent last year and traded at an average price-
earnings ratio of 14.3 at the end of December, still
lower than the 17.4 level for the S&P 500, accord-
ing to data compiled by Bloomberg. As the out-
look for government defense spending dims,
contractors are focusing on streamlining and
buying back shares, says Brian Ruttenbur, an ana-
lyst at CRT Capital Group LLC in Stamford, Con-
necticut. Cash flows are at record levels, and the
companies are deploying those cash flows back to
shareholders, he says.
NICK TABOREK COVERS STOCKS AT BLOOMBERG NEWS IN
NEW YORK. [email protected]
RISKLESS RETURN
You can normalize data in bar and candle charts to
compare the performance of securities. Type XAU
<Crncy> GPC <Go>, for example, to graph gold
with the Historical Candle Chart function. Click on
Compare. To compare with silver, enter XAG <Crncy>
in the TO eld and click on the Silver Spot item in
the list of matches. Click on the box to the left of
Normalize All Series in First Panel so that a check
mark appears. Then click on the Update button.
GENERATING
TRADE IDEAS
The optimizer in
the Portfolio Risk &
Analytics function
has been enhanced
to let you generate
trading ideas based
on goals such as mini-
mizing your portfolios
value-at-risk and
maximizing its Sharpe
ratio. To minimize VaR
of the Standard &
Poors 500 Index, for
example, type SPX
<Index> PORT/I
<Go>. Click on the
Trade Simulation
button on the red tool
bar and select Launch
Optimizer. If a Wel-
come to the Optimizer
window appears, click
on the Close button.
Click on the Tasks
button on the red tool
bar, select Predened
Tasks and click on
Reduce Risk: Mini-
mize Active VaR. Click
on the Run button to
run the optimization.
VaR is an estimate
of the maximum
plausible loss on a
portfolio over a speci-
ed time horizon.
MANAGING
CONTACTS
IN DASH
The Equity Sales
Dashboard has been
enhanced to make
it easier to import
and edit your client
contact information.
Type DASH <Go>,
click on the Manage
Contacts button on
the red tool bar and
select Add Contacts
for a menu of features
you can use to import
contacts. For more in-
formation on the new
enhancements, type
DASH WELCOME
LANDING <Go>.
SYNCING EVENTS
The Events Calendar
function has been
enhanced to auto-
matically update your
Microsoft Outlook
calendar with upcom-
ing company events.
To add an event to
your Outlook calen-
dar, rst type EVTS
<Go> and click on the
AutoSync button on
the red tool bar. Click
on Add AutoSync and
in the pop-up window,
click on the arrow to
the right of Source
and select a category,
such as a portfolio, a
list of securities or a
single stock. You can
then pick the types of
events to track. Click
on the box to the left
of I Conrm That I
Am Logged In With
My Primary Windows
Login and then on the
Add button.
PRICING
WATERFALLS
The Portfolio & Risk
Analytics function
has been enhanced
to let you specify a
hierarchy of price
sources for xed-
income assets and
currencies. Type
PORT <Go>, click on
the View button on
the red tool bar and
select Edit Current
View. Click on Pricing
Source under Calcula-
tion Settings. You
can then specify price
sources in the Fixed
Income Intraday Data
section of the screen.
For more information
on setting up price
waterfalls, type NSN
MZ1VYV6VDKHV
<Go> 97 <Go>.
COMPILED BY JON
ASMUNDSSON
JASMUNDSSON@
BLOOMBERG.NET
TIP BOX
For more recent enhancements,
type NEW <Go>.
The BLOOMBERG PROFESSIONAL service (BPS) is owned and distributed by Bloomberg Finance L.P. (BFLP), except that Bloomberg L.P. and its subsidiaries distribute the BPS in Argentina, Bermuda, China, Japan, Korea and India. Bloomberg Tradebook is
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March 2014, volume 23, number 3. BLOOMBERGMARKETS (ISSN1531-5061, USPS 008-897) is published monthly with an extra issue in December by Bloomberg Finance L.P., 731 Lexington Ave., NewYork, NY 10022, and distributed free to subscribers of
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Normalizing Bars
and Candles
STRATEGIES
WHATS NEW
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