The recent major downdraft in the equity markets of a number of developing nations has returned attention to the issue of extreme volatility in emerging markets and the consequences thereof. William R. Katz, Neil Stratton and Steven J. Fullerton of Citi Research released a report today focusing on brokers, asset managers and exchanges exposure to emerging markets. The report is designed to highlight the relative exposure to continued volatility or a prolonged pullback in EM among Citi Research’s broker, asset manager and exchanges coverage universe.
Asset managers more exposed to emerging markets
One of the primary theses of the Citi Research report is that asset managers are generally more exposed to emerging market than brokers or exchanges:
“…we provide Emerging Markets AUM by equities and fixed income (Figure 1). As a percentage of AUM, our work suggests EM accounts for 5% for the sector, but WisdomTree Investments, Inc. (NASDAQ:WETF) (24%), Franklin Resources, Inc. (NYSE:BEN) (17%), and BlackRock, Inc. (NYSE:BLK) (9%-10%)are most exposed among Traditionals followed by Legg Mason Inc (NYSE:LM) (8%-9%), Eaton Vance Corp (NYSE:EV) (7%- 8%), and Affiliated Managers Group, Inc. (NYSE:AMG) (7%-8%). Among Alternatives, our sense is exposure is generally nominal but The Carlyle Group LP (NASDAQ:CG) is relatively more impacted (~10% of AUM, we estimate). Given domestic footprints, we see the Brokers as relatively less exposed, while Exchanges are likely beneficiaries of related volume upswings due to higher volatility.”
P/E multiples under pressure
The Citi Research report also highlights the possibility that P/E multiples could face compression if there is an extended EM slowdown. “P/E multiples could come under pressure if industry organic growth eases (The Set Up On The Traditionals Is Beginning To Break Down) and a further blow-off in risk could weaken high(er) multiple stocks, including selected equity centric managers such as Affiliated Managers Group, Inc. (NYSE:AMG), Artisan Partners Asset Management Inc (NYSE:APAM), and Waddell & Reed Financial, Inc. (NYSE:WDR) though AMG could be most at risk given significant multiple expansion recently, and what could potentially slow deal flow.”
Citi’s suggested sector positioning
The analysts describe their current sector recommendations as “bullish on alternatives” while “price sensitive” on traditionals, broker/dealers and exchanges. “We are fundamentally most bullish on Alternatives while broadly price sensitive on Traditionals, B/Ds, and Exchanges. While P/E ratios are beginning to screen better for the latter sub-set, we think it is still too early to get constructive–though further pullback could change this view. Our favorite names are The Blackstone Group L.P. (NYSE:BX) (Alternatives), Invesco Ltd. (NYSE:IVZ) (Traditionals), LPL Financial Holdings Inc (NASDAQ:LPLA) (Broker Dealers), and NASDAQ OMX Group, Inc. (NASDAQ:NDAQ)(Exchanges).”