Is it Smart to Invest in Re-Emerging Markets?

The transient and unpredictable nature of business is arguably the greatest challenge for investors. Over time, however, economic analysts and experts have devised several concepts to help investors evaluate risks and opportunities in various regions. One of these concepts is that of an “emerging market”, which, simply put, is the middle ground between a developed and a developing market. More specifically, Dr. Vladimir Kvint characterized an emerging market country as “a society transitioning from a dictatorship to a free-market-oriented-economy, with increasing economic freedom, gradual integration with the Global Marketplace and with other members of the GEM (Global Emerging Market), an expanding middle class, improving standards of living, social stability and tolerance, as well as an increase in cooperation with multilateral institutions.” China and India are two of the most common examples of such markets.

During the past few decades, the concept of emerging markets has grown and climbed its way up the international business scene as a way to benchmark economies with fairly untapped but great potential.

In recent years, however, those that were originally identified as emerging markets or economies have been slowly deteriorating alongside the bigger picture which is the global economic crisis. These changes have caused most of the global business sphere to question and re-evaluate the validity and reliability of the concept of emerging markets as a reference for investment decisions. On the other hand, more recent opinions have posited that such previously declining economies are now getting back on their feet, thus giving rise to the term “re-emerging markets”.

Perhaps a most fitting example of such fluctuations in terms of market stability and investment opportunity are the Fragile Five, namely: Turkey, Brazil, India, South, Africa, and Indonesia. These five emerging economies were termed as such by research analyst Morgan Stanley in 2013 because of their unhealthy dependence on foreign investments to finance internal growth, therefore presenting higher risks against inflation or trade and fiscal changes.

However, the five currencies have been improving in the past few months that some commentators now call them the “Fantastic Five”. For instance, a report from Merrill Lynch indicates that almost all of the Fragile Five countries ranked among the best-performing assets this year.

It's very interesting to note that it has not even been a year since the term “Fragile Five” was coined, but current performance indicators are already stripping the said economies of their title. This only goes to show that classifications such as “Fragile Five” or “emerging markets” are essentially temporary and prone to change, especially in today's remarkable volatile economy.

Most experts, on the other hand, still believe that the decline of emerging markets is far from over. In fact, Deutsche Bank reports that real policy rates in emerging markets have plateaued and averaged a mere 1.1 percent since 2009, which is a remarkable drop from the average of 3.4 in 2008. Henrik Gullberg, a strategist from the Deutsche Bank, therefore asserts that “[m]onetary policies are far from ‘tight' and there has been little evidence that policymakers are willing to tighten fiscal policy where needed to facilitate the adjustment.” Gullberg adds that if policies are not rebalanced and the phenomenon of domestic absorption remains unaddressed, such markets will continue to suffer the most as a result of such changes.

The opinions described above clearly present conflicting views on whether investing in emerging markets (or re-emerging markets, if that's where you sit) is a wise move. What, then, should we believe in?

Drawing from my own experiences in global investment, I would personally advise refraining from depending too much on these arbitrary classifications. One key philosophy I've learned is that investment decisions are too important to depend on second-hand opinion and popular whims. However, it is undeniable that some of these trends provide helpful insights to guide investment decisions.

John Redwood, a renowned investment analyst and chairman of the Charles Stanley Pan Asset investment committee, published a recent article on the Financial Times of the potential opportunities and growth predictions in certain emerging markets such as China, India, and Brazil. Redwood advises investors: “You need to be selective, as the emerging market category covers everything from risky Venezuela to industrious China, with varying degrees for political risk, economic success, and different stages of the interest rate cycle.” This advice rings true to my own, which is that while latest figures may renew the fervor for (or at least assuage the hesitancy against) emerging markets, we must keep in mind that these markets are, at their core, always in limbo. They have yet to develop into stable economies, and this is a risk that must always be taken into account vis-à-vis the opportunities that have recently emerged.
By Arun Panchariya
Arun Panchariya is the Consul General of Liberia to Dubai. He is at the same time the Owner and Managing Director of Global Finance and Capital Ltd. in UK, an international financial management company that undertakes numerous financial plans and projects in the emerging markets. He started out in the textiles industry in India, then eventually ventured out to other industries such as investment banking and commodity trading. After entering the London market in 2003, Arun engaged in several business tie-ups in Europe, Asia and later in Africa.

Copyrighted 2020. Content published with author's permission.

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