The Emerging Markets Handbook

An analysis of the investment potential in 18 key emerging market economies

Pran Tiku

• Publisher: Harriman House
• Year: 2014
• eBook ISBN: 9780857194145
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

FINDING TOMORROW'S MARKETS FIRSTTomorrow's booming economies are today's emerging markets. Overlooked by most investors, these markets offer serious opportunities for those prepared to move ahead of the crowd and take their investing off the beaten path.If you're an investor unafraid of the unfamiliar and looking to carve out extraordinary opportunities in new markets, this book should be your starting point.THE EMERGING MARKETS HANDBOOK provides investors with a highly detailed examination of 18 countries that could host the stock market stars of the future - from Chile and China to Thailand and Turkey.At its heart is an analysis of the 18 economies' strength and potential for growth. This assessment is based on the ten crucial drivers of growth, including demographics, business conditions, capital markets and more. Following exhaustive research into the numbers behind each of these drivers, Pran Tiku is able to draw on a wealth of data from respected sources to form conclusions about the current position and future prospects of each market. He illustrates this data with explanatory charts and tables, allowing readers to trace recent trends and compare this to where the countries stand now.Providing a groundbreaking ranking of all emerging markets, the author goes on to sort them into standouts, in-betweeners and strugglers. This means you can truly see which markets offer the most commanding opportunities, which have room for development and which currently present a poorer investment case.Finally, the HANDBOOK concludes with a look at investment vehicles that can be used to access emerging market investments and a survey of the industries and companies that are likely to be the primary players within these 18 economies in the future.THE EMERGING MARKETS HANDBOOK is your indispensable guide to finding the future's hottest markets. No investor can afford to be left behind.

Part I: Development of Emerging Markets

Chapter 1: What is an emerging market?

The term emerging market conjures up an array of images. Faraway countries. People toiling away in factories and fields. Densely-packed urban centres teeming with millions. Chaotic marketplaces with hawkers and peddlers. Children in uniform. People riding bicycles, pulling rickshaws and driving trucks on dusty, impassable roads.

These are the places that host more than three-fourths of the world’s population, most of the world’s land mass, and half of the world’s energy consumption. Emerging markets and the countries that contain them span continents.

Some emerging market countries are democratic in the Western sense of the word, with enshrined freedoms. Some are struggling for freedom. Others have carved out their own systems that border on state control. Emerging markets are diverse, ranging from struggling to sterling success and in many cases this is independent of political structure.

Definition

Emerging markets are defined more by what they are not than by what they are. They are certainly not developed markets like the US and Europe. Beyond that, there is a lot of debate as to what truly constitutes an emerging market. Most agree that the centrepiece of the definition rests on the thesis that in these countries:

1. political and financial institutions are less developed or transparent, and
2. governance lacks predictability.

There is a widespread belief that most of these countries have less than adequate rule-of-law and lack clearly defined property rights.

In short, the rights, rules and governance one takes for granted in the developed world are wholly or partly absent in developing or emerging markets. The Center of Knowledge Societies describes emerging market economies as “regions of the world that are experiencing informationalizations under conditions of limited or partial industrialization.”

There is a reasonable consensus that income and consumption levels, which tend to be low compared to the developed markets, define emerging countries. But both emerging market income and consumption are on the rise. Trade and globalisation are pushing many of these countries into the limelight as they exploit their dominant human potential using current technology and natural resources.

Beyond that, there are several points of disagreement. Some emphasise quantitative factors, such as GDP or GDP-per-capita, population statistics, growth rates, etc. Some suggest qualitative factors such as system of government and/or the level of transparency. Others feel that socioeconomic factors such as literacy, health, and the status of women and children are important considerations.

As such, articulating a single definition of emerging markets, and getting agreement on what such a market is or what countries may be called emerging, has proven to be extremely difficult. A clear consensus does not exist and perhaps it never will.

Related to this, there is no single factor that is likely to propel emerging markets. What is important is a combination of quantitative, qualitative and sociopolitical factors (which, for convenience, we shall group together and call the ten drivers of growth). These factors will be critical in determining the fate of many of these emerging nations.

Millions of aspirants

The rich, developed world has reached the peak of its consumption. Its aging population is a demographic time bomb – particularly for Western Europe and Japan. These countries, along with the US, have been the bulwarks of growth led by consumption. Who will replace this population of consumers as they dwindle in numbers?

The logical answer is found in the currently low-consuming billions who live in emerging markets. This is where (in economic terms) the supply and demand curves are likely to intersect over time. The needs of the emerging markets are as wide as they are deep – from improved infrastructure and healthcare to food and education. The hope is that supply of goods and services, and transfer of technology and knowledge (abundant in the developed nations of today), will find its way to the developing world in an orderly manner and enhance the opportunities and living standards of millions.

Multinational corporations today know this. They are feverishly pursuing the markets in emerging countries, and in many cases achieving disproportionate shares of profits from the rising demand that exists there. These companies even recognise that in order for them to prosper it is not sufficient to export goods manufactured cheaply in these emerging countries; they must go beyond that and utilise locally-created human capital and innovation.

Companies from General Electric to Google and Microsoft to Mitsubishi are racing to invest billions of dollars into creating new innovation centres in many of these countries. This is not likely to be a short-term phenomenon, but a process that is decades in the making. The path to growth in many emerging markets is likely to place less emphasis on politics than economics and less on ideology and more on opportunity. It is likely that many emerging market nations will be propelled to achieve in decades what took centuries in the past, given access to modern technological advances.

Today we live in a world where boundaries are blurred by the use of fibre optics and satellites. With these, many faraway areas and underdeveloped countries can bypass the multistage development of earlier years. For example, a country such as Botswana can completely bypass laying cable and landline infrastructures and leapfrog straight to cell towers, making world class communication cheaply available even to poor citizens. In another example, India is developing a state-of-the-art identification system using embedded information chips to protect the identities of its billion-strong population. The process is expected to be completed within a few years.

So, emerging markets are more defined by their trajectory than by their current circumstances, or more by their aspirations than by their accomplishments. Backers of emerging markets are watching and hoping that the progress in many of these countries can be sustained as their populations dream of a better future. Therein lies the promise of emerging countries.

Fortunately, this is a circumstance and an opportunity where most countries can win. The developed world gets what it wants: a large, new body of consumers with rising incomes and aspirations. Emerging countries get what they want too: vibrant economies, rising incomes and living standards, and likely avoidance of social upheaval.

Emerging markets – a bit of history

World Bank economist Antoine van Agtmael coined the term emerging market in the 1980s. He argued that although these countries suffered from governance and transparency issues, they represented above average growth rates as they were transitioning towards better economic and financial conditions. Agtmael published this thesis in his 1984 book, Emerging Securities Markets.

There were other early proponents of international and emerging markets, such as Sir John Templeton, who started international and emerging market mutual funds in the early 1980s. Templeton’s emerging markets mutual fund, run by the legendary Dr. Mark Mobius, is still actively traded today. In the early days, this was one of the few emerging market opportunities for ordinary investors.

In 1999, the first index of emerging markets (later acquired by Standard & Poor’s) was developed. As investing in these markets became more profitable, investors became interested – slowly at first, but with greater enthusiasm as years progressed. Firms such as Morgan Stanley and Goldman Sachs began using their vast market influence to secure investments for new funds dedicated to emerging markets, and Goldman Sachs garnered further interest by publishing their well-known papers: ‘Dreaming With BRICs’ in 1999 and ‘Building Better Global Economic BRICs’ in 2001.

This catchy acronym, BRIC, referred to four countries: Brazil, Russia, India and China. The overall theory was that these countries represented above average opportunities based on demographics, growing consumption, technological innovation and rising living standards. The timing for emerging market investing and the idea of BRICs was perfect as the recession and technology burst of 2000 had just ended.

Investors’ animal spirits were rising again. China, India and Brazil in particular were in the news for spectacular growth that exceeded that of the US and Europe by two-to-three times. At the time, Japan was still stumbling through its decades-long recession. Goldman Sachs created a special BRIC fund and BRIC50 fund, both of which became major hits with investors. The influx of capital to all four BRIC countries multiplied.

The great recession

This wave of economic growth and the stock market and real estate boom continued around most of the world (including the emerging countries) until late 2007. It all came crashing down in late 2008 and early 2009. The crash and the great recession that followed destroyed a large slice of wealth created during the boom years from 2003 to 2007. This recession created large tidal waves beyond the shores of America and Europe and in fact it hit the emerging markets even harder. Even though many of these emerging countries did not suffer economically or even record a recession, their stock markets lost substantial value.

However, stock markets also recov...

Table of contents

• Cover
• Publishing details
• Follow us, like us, email us
• About the author
• Preface
• Acknowledgements
• Introduction
• Part I: Development of Emerging Markets
• Part II: The Emerging Markets
• Part III: Comparisons and Sorting
• Part IV: Investing in Emerging Markets