As Emerging Markets Evolve, Opportunities Emerge

Investing in emerging financial markets can be a frustrating experience. Investors have frequently made what looked like fantastic returns, only to find themselves trapped as markets crash.

Yet emerging markets continue to look compelling as an investment opportunity, judging by the confidence of the asset managers I met at a recent roundtable.

Emerging markets have evolved and now offer more diverse opportunities

Emerging markets have driven the lion’s share of global economic growth for decades, and their combined economies now represent around half of global GDP, though still less than 10 per cent of global market capitalization.

Confidence is high for these reasons, but emerging markets are also attractive as they have evolved in recent years and now offer more diverse opportunities and ways to manage risk.

Positive And Promising Changes

From the asset managers I spoke to, it was clear that one of the big changes in emerging markets over the last 10 to 12 years has been the development of local-currency bond markets. This has opened up a whole world of investment opportunities, adding multiple dimensions to trading, which is no longer just about the risk of sudden default.

In fact, there is now a sense that in the current political climate, it’s actually developed markets that are the focus of political risk, while their emerging market counterparts have become more stable.

Currently, many Standard Chartered clients are very interested in India, attracted by the political stability and reform agenda. Interest in China is also high, and we think continued liberalization will bring more investment flows into the country.

Another positive trend that’s creating interest is the emerging affluence in many of these markets, boosting spending in local economies.

However, you can’t just make a one-size-fits-all judgement on such a diverse range of markets, many of which are subject to sudden and rapid change. Clearly, for investors it pays to be vigilant. In the forex market in Malaysia at the end of last year, for example, there was nervousness around speculation. So at a moment’s notice the regulator imposed tighter reporting requirements, which brought the whole market to a standstill.

Tax is another potential pitfall. It’s possible in many regions for local tax authorities to rollout new requirements for capital gains at very little notice. Investors need a constant tax screen to identify potential risk in this area.

“Many investors are willing to take the chance on emerging markets.”

Many other operational challenges remain, influenced by regulation, market structure, counterparties and governance, and often there is a lot of work required behind the scenes to make a success of emerging market investment.

As a large international bank working in these markets, we have been trying to bring institutional investors, regulators and exchanges closer together to foster an environment more conducive to attracting international investor flows, and this kind of approach is now becoming more widespread.

Despite the challenges, many investors are willing to take the chance on emerging markets. And, with a selective approach, and the right preparation and risk management, it’s a strategy that can pay dividends.

Photo Credit: Jacob Silberberg/Panos