Emerging Markets For Dummies
Emerging and frontier markets have
opportunities for growth that often aren’t available in more
developed economies. These come from three main sources: new,
pervasive technologies; the improved spending power of a growing
middle class; and gains from greater trading activity with other
countries. When you look at investments, you want to look at how
these changes create growth opportunities.
The fact is that, as a whole, the rate of growth in emerging markets for the past decade and a half has been twice that of advanced countries, and this trend is unlikely to abate anytime soon. This is why there is increasing interest in emerging markets by companies in advanced economies, where growth has been much slower. Importantly, these growth differentials reflect a secular transformation in the structure of the global economy, not a cyclical phenomenon occasioned by the current economic/financial crisis. This is a critical distinction that too few corporate executives appreciate.
★Computer and software technology:- Companies have taken advantage of the high education rate and low cost of living in emerging markets. Customers for emerging-market high-technology services are usually in developed countries, but lesser-developed countries needing technological assistance turn to their emerging-market brethren for more affordable expertise.
★Leapfrogging technologies:- In a developed economy, incredible investments in technology are in place and are fixed. However, one of the greatest opportunities in emerging markets is to be on the ground floor of companies that are working on technologies that aren’t yet economically feasible for big multinational corporations to try--Markets for machinery--Products manufactured in emerging markets often are smaller and more basic than the products in developed economies. They may seem like a step backward to people in developed countries, but they can be vital to making life better for those living in less-developed countries.
★Better trade opportunities:- Trade benefits both the importer and the exporter. It lets people capitalize on their skills. If they’re good at making something, they can keep doing that even if they make more of a good than people at home can use. And if they need something, they can buy it from those who produce it, wherever they are.
★A comparative advantage:- A reality of emerging markets is that they don’t produce all goods as efficiently as people do in developed markets. It may take more time to complete a product, and some of the output may have to be rejected. But because wages are low, the value of the acceptable goods produced per dollar spent on wages is often higher.If a nation’s businesses can produce something at a lower cost than it can be produced elsewhere, even after adjusting for extra time and higher error rates, the country is going to benefit from trade. And that’s where emerging markets find their niches.
★Free trade:- If trade is restricted, it’s harder to get people the goods and services they need most at the most efficient price. That’s why a key focus in the world is free trade, free trade between nations free of quotas and tariffs. In addition to tariffs, governments sometimes protect local industries through regulation. Because trade moves better when it’s free of restrictions, 153 nations have joined the World Trade Organization, which negotiates the rules of trade among nations and settles disputes as they arise.Free trade can be controversial because some people lose when they have to compete with imported goods. However, free trade is good for people overall, and a commitment to free trade can also help emerging markets grow faster.
★Growing the middle class:- To a certain extent, an emerging market is really a market where a middle class is emerging. As jobs and opportunities are created, more people move out of poverty and into a comfortable middle zone where they can afford some luxuries that were previously unimaginable. They go out and spend their money, creating more economic activity.The middle class isn’t the only beneficiary. As a country’s economy improves, the poorest people tend to become less poor, and even they have more money to spend. Even a small improvement in income represents a huge increase in purchasing power. Yes, the money goes to subsistence needs, especially food, but even that spending power represents an improvement in an economy and in the health of the people.
★Fair trade:- Some people have greater access to the market than others, either because of their technological sophistication and business acumen or because of the infrastructure of the country where they operate or both. Fair trade is a movement to give producers of agricultural products and handicrafts in developing nations some of the advantages of their competitors in developed countries in order to make the terms of trade equal. Some international federations are trying to improve markets and to create branding that would attract buyers in developed countries.
In many cases, the risks are either highly understated or grossly
overstated. The same is true with opportunities. Take China, for
example. Many executives of large companies believe they should—and
can—do business there, having worked for two decades in China, the
investment environment there is far more nuanced and complex than most
investors appreciate.
it’s a classic case of a place where the on-the-ground investment
risks generally are understated. At the other extreme, consider Africa.
They don’t know that about one-half of the population in sub-Saharan
Africa lives in countries where GDP growth, adjusted for inflation, has
averaged more than 5 percent per year over the last two decades, or
they don’t know that there is a burgeoning African middle class.
Indeed, a large number believe there simply aren’t any realistic
investment opportunities in Africa. At the same time, people see African
markets as fraught with excessive risk. There are, of course, appreciable
risks of investing in Africa—just as there are substantial risks of
investing in Latin America, Asia, the Middle East, the former Soviet Union,
and so on. But the perceived risks in Africa are grossly overstated.
In fact, according to recent data from the United Nations Conference on
Trade and Development, Africa offers the highest risk-adjusted returns on
foreign investment among all emerging economies.It’s not just advanced
country CEOs who are pondering investment in emerging markets. Powerhouse
multinationals out of Brazil, China, India, and South Africa —among
others—are themselves competing across their own geographies.
They’re confronting a host of new risks and opportunities as they aim to
compete not only with their longtime rivals from developed countries but also
with world-class emerging market firms. Consider the athletic footwear
industry. Most of the major athletic footwear firms are headquartered in the
North but produce a majority of their output in the South, especially in
China. And, as it happens, a sizable portion of Chinese production in this
sector is exported to Brazil.
The result is that Brazilian athletic footwear manufacturers feel they cannot
effectively compete against the Chinese—so much so that Brazil believes
these products are being dumped at an artificially low cost into the
Brazilian market. Consequently, Brazil’s government placed a duty on
imported Chinese athletic footwear. This ensuing trade war among the
governments of two large emerging markets has sideswiped the world’s major
branded athletic footwear companies, cutting their sales revenues and leaving
these companies with little recourse for remedies in the short run.
Carrying out world-class due diligence can be more difficult in emerging
markets since, by definition, their institutions are nascent and their
information frameworks less developed. Companies rely on self-proclaimed
experts in the local economies, only to discover that these people
themselves are not the best people to have relied upon. The ability to
perform world-class due diligence comes from having done it repeatedly
throughout challenging parts of the world so there is the capacity to
recognize similar problems when they crop up, and the information is
collected and interpreted by parties who are independent to the
transaction and are mutually trusted by all sides.
The sizeable potential returns seemingly presented by these
fast growing markets, the perceived high risks of doing
business in them undercut the prospects for actual consummation
of investment deals.The consequence is that
investors—especially corporates based in the advanced
countries—pass over sound opportunities in some of the most
promising emerging markets, where risk-adjusted rates of
return, in fact, are—or can be made to be–truly sizeable.
Not only is “money left on the table”, but in doing so they
surrender competitive first-mover advantage to rivals, perhaps
most notably world-class multinationals emanating from the
emerging markets themselves, who, in time, could well undercut
advanced country firms’ market positions on their own “home
turf”.
To be sure, accurately assessing the opportunity-risk tradeoffs of investing in emerging markets is, by the very nature of these markets, a tricky enterprise. But in many cases—though not all—the perceived risks are either understated or overstated, and the same goes for the perceived returns.
★CONCLUSION:-
The industrial landscape of the world market has changed unalterably.
But this is just the beginning. There will be multiple growth nodes
from here on out and not just between the advanced countries and the
emerging markets—but within emerging markets. The effect on
companies from the developed world will continue to be profound.
Adopting an investment strategy informed by accurate information and
trusted partners with deep local insights and experience is the best
way to navigate the risk-opportunity tightrope. But the biggest risk
in emerging markets could be just ignoring them.