The Emerging Markets Handbook. Pran Tiku
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when the G-7 expanded into the G-20 in 2009. The expanded Global Club of 20 nations now includes emerging market countries such as China, India, Brazil, South Africa, and many others, as a part of what was previously an exclusive club of mostly Western countries. Ironically, this club includes countries like Italy, which is a poster child of financial mismanagement and excess. Since 2009, institutions such as the IMF (International Monetary Fund), World Bank and the United Nations have rapidly begun to assimilate a number emerging market nations into their inner circles. The significance of these moves has not been lost on investors as money began flowing into these regions, both through direct investments and participation in joint projects.
Lately, however, the pendulum has swung back and investors have cooled off emerging markets once again. They are shifting their focus back to the United States, in particular, as its economy recovers. So it goes – the back and forth of investor sentiment as applied to emerging markets.
Homeward bias vs. growth
Many investors continue to ask why it’s necessary (or desirable) to take on an extra layer of risk in a world far removed from their daily lives.
The fact is that by all objective measures the average investor is seriously under-invested in emerging markets. Ironically, in the name of playing it safe an entire generation of investors continues to forgo the regions that offer the greatest potential for growth and profit. Some of this is grounded in what has been widely recognised as homeward bias. It’s also referred to as the devil you know theory.
As the global economy becomes ever more interconnected, the growth rates of emerging markets are poised to far exceed those of the developed world – mainly the United States, Europe and Japan, which are regions currently burdened by excessive debts and deficits. Substantial academic research strongly suggests that investors are better off diversifying their investments globally and not chasing returns based on the most recent performances. The real risk, therefore, is continuing to invest with the herd based on outdated theories and strategies.
Separating from the herd
This book is written for those who don’t wish to follow the herd. It makes the case that there is a fundamental shift taking place throughout the emerging market economies.
This shift in most cases is persistent and positive and will lead to a dynamic change not only for these emerging countries but also in the developed world. To be sure, the upcoming changes are not likely to be either uniform or guaranteed, but the students of this change can benefit.
The position taken in this book is that understanding the drivers and motivations taking place in emerging markets is important for investors. Many of these nations, previously left to benign neglect by the developed world, are now on the threshold of electrifying change. This change will not only accelerate their economies and raise their living standards but also enhance their political stature as they play ever-larger roles in global finance and trade. This is not only true for countries such as Brazil, Russia, India and China (the so-called BRIC countries), but also for those as diverse as Indonesia, Chile, the Czech Republic and the Philippines.
In the following chapters, an in-depth, country-by-country analysis is provided to explore the opportunities – as well as potential roadblocks – these countries are likely to encounter and how that will affect the investing landscape.
As a part of the country analysis other questions have also been addressed, such as:
How does one define an emerging market?
How many countries fall into this category?
What countries and sectors have the greatest opportunity for profit and growth?
What countries and sectors have the most uncertainty?
Should money be invested in funds or individual companies?
And lastly, how does one get started in emerging market investing?
Answers to these questions are provided.
Investment advisors and investors will gain specific, actionable insights into how to intelligently invest in these developing economies. The book is not an abstract endorsement of emerging markets, but rather a practical investment guide that offers a primer on the basics of these regions and sectors. As such, it takes you through the first step in the process of building your own emerging market portfolio.
Structure of the book
The book is divided into three sections. The first lays the groundwork and explains some of the fundamental reasons for, as well as the major risks of, investing in emerging markets. The institutional framework of classifying emerging markets and challenges posed by differing criteria of selection will be explained. This will be followed by explanation of how the emerging markets have been classified and the criteria that were used for choosing the 18 countries that are featured.
Ten drivers
The most important part of this section is an overview of the ten drivers of growth. These drivers are the factors that will have a significant impact on the short-term and – more importantly – the long-term future of many of these countries. You should note that as the countries profiled throughout this book are examined, it becomes clear that not all emerging markets are the same. Drivers in some countries are actually the detractors in other countries.
For example, one of the drivers examined is demographics. Demographics for countries such as India and Indonesia show a young and growing population that can truly be a positive force and therefore a major driver of future growth. On the opposite end of the spectrum, Russia’s aging population means its demographics are likely to be a detractor.
Another possible driver/detractor is institutional functioning and governance (although proper institutional functioning and governance are a challenge for all emerging economies). Some countries, such as Indonesia and Chile, have remarkably improved their governance and institutional functioning; for South Africa and India, however, this continues to be a detractor.
The ten drivers are used to assess the trends present in these countries: from fiscal conditions and environmental rankings to political freedom and ease/accessibility of starting a business, and many others.
Country by country
The second part of the book is devoted entirely to the 18 emerging markets. This section starts with a brief modern history of each country to provide readers with context. This is followed by a detailed analysis of each country to assess how it stacks up on the ten drivers of growth.
It should come as no surprise that each country covered is a mixed bag. There are positive dynamics running through many of these markets, alongside some major challenges. Frankly, there are no clear-cut winners. But, as readers will also likely determine, there are countries worthy of consideration. At the end of each country chapter a very brief summary is presented, in a section called ‘In a Nut Shell’.
By exploring the positives and negatives, and upsides and drawbacks, of these markets readers will gain an understanding of the trends and opportunities as well as the risks.
Sorting countries – standouts and struggling
In Part Three an answer is sought to how the countries should be sorted based upon whether they are standouts or strugglers when assessed by the ten drivers of growth. Readers are invited to use the analysis to arrive at an answer.
Investment opportunities in selected countries
Part Four of the book is devoted to suggesting investment opportunities within the selected countries. Readers will find this a good starting point before moving on to their own research into investments in emerging markets.
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