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The great global recession – emerging markets suffer and recover
The global recession of late 2008 to early 2009 proved to be a turning point. As the United States, Europe and Japan suffered through a banking and debt crisis – to the point of near collapse – emerging markets suffered in tandem. This downturn occurred despite the fact that most emerging markets did not have banking or debt related problems – and as a matter of fact many emerging markets never went into recession. What happened was that investors (ready to avoid risk at all cost) implicated emerging markets by association, and exited any investments they considered risky. In the atmosphere of utter panic, people were in no mood to ask questions. Rather, they were interested in shooting down anything that did not meet their standard of absolute safety.
Yet it was in the aftermath of the recession that the economic strength of these regions was defined. While the US stock markets recovered some of the lost value in the subsequent year (2010), emerging markets came back even stronger. Such volatility based on sentiment and money flows is a part of the story of emerging market performance.
The credibility of emerging market nations – both in political and economic terms – was institutionalised 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
