The other day, there was a request on one of my LinkedIn groups for good emerging markets investment blogs. There was a lack of replies, which suggested a gap in the market. So I thought about what would make a good emerging market investment blog, and this is what I'm going to try to create here. There are some blogs that cover this space, and I've linked to them on the side, and in another article I list them with my own comments. Naturally, I'll be delighted to read and link to other blogs that you may suggest.
Now, what's this blog all about? "Emerging markets" as a term really evolved when the World Bank decided (rightly) that "poor, badly governed, possibly post-Imperialist, underdeveloped countries" was neither catchy or politically correct enough. The term perfectly captures the amount of work that the intrepid development bankers at the World Bank needed to do, coupled with a note of hope about what the countries would become. There's even a metaphysical aspect - "developing" carries with it an undercurrent that these countries must necessarily become like the West, whereas "emerging" implies that they have some choice about the path they will take.
But enough psycho-linguistics. An investment blog has to talk about making money. And the reason why investors are attracted to emerging markets is that they offer the possibility of growth, similar to that undergone by the greatest emerging market of them all, the USA. If only we had invested in Manhattan farmland, or Woolworth's, or Coca-cola, or Wal-Mart, any of the other great companies that have made money by catering to the needs of the nation as it grew from frontier land to Great Industrial Nation. As we look at the countries that have made these great leaps forward, it's a natural inclination to look for those who haven't done it yet, and assume that they will follow as well.
And by and large, the pattern has played out quite well. Take a country with a reasonable endowment of land, natural resources and population, add some Washington consensus pixie dust, and countries like South Korea, Singapore, Poland and Australia have made their ways from economic backwaters in need of assistance from development banks to being industrial nations in their own right. Take the countries in the graph below - if China with its 1.3 billion population goes from 37 cars per thousand population to 370, that takes you from 50 million cars to 500 million. Total world car production in 2010 was 58 million (OICA)! And we can say the same with housing, roads, or any one of the trappings of civilisation.
Cars per 1000 Population
Now, what's this blog all about? "Emerging markets" as a term really evolved when the World Bank decided (rightly) that "poor, badly governed, possibly post-Imperialist, underdeveloped countries" was neither catchy or politically correct enough. The term perfectly captures the amount of work that the intrepid development bankers at the World Bank needed to do, coupled with a note of hope about what the countries would become. There's even a metaphysical aspect - "developing" carries with it an undercurrent that these countries must necessarily become like the West, whereas "emerging" implies that they have some choice about the path they will take.
But enough psycho-linguistics. An investment blog has to talk about making money. And the reason why investors are attracted to emerging markets is that they offer the possibility of growth, similar to that undergone by the greatest emerging market of them all, the USA. If only we had invested in Manhattan farmland, or Woolworth's, or Coca-cola, or Wal-Mart, any of the other great companies that have made money by catering to the needs of the nation as it grew from frontier land to Great Industrial Nation. As we look at the countries that have made these great leaps forward, it's a natural inclination to look for those who haven't done it yet, and assume that they will follow as well.
And by and large, the pattern has played out quite well. Take a country with a reasonable endowment of land, natural resources and population, add some Washington consensus pixie dust, and countries like South Korea, Singapore, Poland and Australia have made their ways from economic backwaters in need of assistance from development banks to being industrial nations in their own right. Take the countries in the graph below - if China with its 1.3 billion population goes from 37 cars per thousand population to 370, that takes you from 50 million cars to 500 million. Total world car production in 2010 was 58 million (OICA)! And we can say the same with housing, roads, or any one of the trappings of civilisation.
Cars per 1000 Population
 |
Source: Wikipedia
It's the growth, stupid!
The bottom line is that emerging markets are seen as having room for growth, and the attraction for investors is the possibility of investing in that growth at an early stage. The danger of course is that expectations will not be realised, but then no risk, no return. If it were so easy to generate economic growth, many more countries would have done it a long time ago. Some countries may lack a favourable external environment, which starves them of the resources that they need such as raw materials or capital. One of the themes we will be talking about is whether oil shortages, leading to higher oil prices, could be fatal for the development of countries without their own energy. But in general the miracle of comparative advantage means that countries can get the resources they need via trade.
Most countries fail to deliver growth because of internal institutional constraints - in general it's because existing bureaucracies won't give up their power, and so won't liberalise enough to allow entrepreneurs to drive the economy forward. There is no question that North Korea has the potential to become just as much of an economic tiger as its Asian neighbours - it shares their advantages of a cheap, educated labour force and proximity to the huge markets of China. However overwhelming state control and the absence of private business means that its potential is unrealised. On the other hand, doom was predicted for the Baltic states when they decided to go it alone - they had no raw materials, industrial sectors that depended on cheap energy from Russia, and a recession in Western Europe - however, they got their policies right, and have acceded to the European Union, even though many economists predicted disaster when they went cold turkey from Russian gas.
Between these extreme examples though, lie many stories which are more mixed, and the challenge for the analyst is to identify where the opportunities are in a particular country, given the resource and institutional constraints of a particular country. For instance, some analysts say that you should always buy beer and cement companies in emerging markets. Beer because higher GDP per capita means that people will have more money to treat themselves to a nice cold one at the end of a hard working day, and cement companies because their output will be needed to build all the infrastructure, from roads to office blocks to housing for urban workers. But then, the former might not be such a good idea in an Islamic country, and in many cases the cement industry may be controlled by private or international conglomerates, leaving no opening for the equity investor. But the general idea holds true - things need to be built, and people will consume more, and someone is going to make money in satisfying those wants, and that is the opportunity for the investor.
The great thing about emerging markets is that it's win-win. Not so with emerging companies - if someone starts up a new car company in America, for instance, then if it succeeds, it will almost certainly be at the expense of the existing car companies. The producers of Android tablets would love to do well, but this will require them to take customers away from Apple (fat chance, IMHO). Whereas if, say, North Korea were to suddenly see the light and embrace the "right" policies, then net-net, everyone would be better off. Of course, they would produce some things that are produced elsewhere, and there would be competition, but just as many countries would benefit by selling things to the newly-enriched North Koreans. In general growing countries run current account deficits in the early stages of their development, which means that someone is benefitting from extra demand. And even if one country's welfare is reduced by having its exports undercut by a lower cost producer, then other countries are having their welfare increased by having lower cost goods available. Net global economic welfare is increased by a more efficient use of resources.
So what's the manifesto for this blog? In some ways, emerging markets are old hat - many markets have already emerged, or even if they are still emerging, there are so many brokerages and commentators talking about them, that there isn't much that is new to say. And if there aren't people talking about it, it may be because there is not much to talk about, which explains the lack of Belarussian or Burmese brokerages. But then you could have said that when the term BRIC was coined, ten years ago in 2001. There was nothing new then, and yet the subsequent decade saw billions of dollars being dedicated to this asset class. And there is still plenty to discuss. There are still many questions about how China will develop, with much of the commentary either slavishly applying basic macroeconomics to an economy whose institutional structure doesn't fulfil the underlying assumptions of classical (or neoclassical) macroeconomics, to issues about how the European periphery will develop given the likely endgame of the Euro crisis, to the eternal questions of whether or not overpopulation and or over-consumption of natural resources will kill growth in the bud. I don't think that the answers to these questions are readily available, so I propose to discuss them in this blog.
|
