Emerging Markets

Anastasiia Rykunich

How can a U.S. economy slumped in a recession be salvaged?  How can investors gain proximity to bigger target markets, a lower waged workforce, and low cost raw goods?  How can investors reduce risk by diversification of funds?  How can investors gain access to a world with lower environmental regulation thresholds?  How can an investor exploit the rule of reciprocity leading to political incentives like lower tax rates, subsidies, and grants? 

By investing in emerging markets!  Savvy investors will be able to use the free flow of capital across international borders to seek out and earn the highest rate of return. 

The World Bank lists an emerging market as a country having low to middle income levels per person, or, as being a country with an underdeveloped stock market.  Emerging market countries produce around 20% of the world’s goods and services and represent over 80% of the world’s population. More than two-thirds of global growth is occurring in the countries of these emerging markets. These countries also account for a rising share of world trade.

The following countries are considered to be the emerging markets offering appealing low-cost environments: Argentina, Brazil, Chile, China, Colombia, India, Mexico, Romania, Ukraine, Bulgaria, Middle East, and parts of Africa.  According to the Forbes International Investment Report, a $10,000 investment in these emerging markets in 1999 would be worth more than $18,000 today, even after the terrible crash in many of these markets last year. That same investment in the U.S. would have dwindled to $6,500. This troubling investment market has not changed as the outlook for U.S. stocks and the U.S. dollar aren’t much better today.

Establishing joint ventures and partnerships in economically emerging regions like Asia-Pacific, Eastern Europe, and Latin America is one of the most promising ways for a company to create revenue streams. That’s because, by outsourcing goods in the local market, a company can compete more effectively and expand its business. Additionally, low-cost country manufacturing can yield reduced costs for a company’s global factory network as well. In fact, a company outsourcing materials or products from a low-cost region can improve its bottom line by reducing its purchase price up to 40 percent.  At the same time, forming joint ventures helps to reduce the costs of dealing with local governments, since the local producer knows the rules of the local game.

However, there is always a risk of technologic and business spillover that foreign producers can obtain. In order to prevent that potential threat a parent company should ensure that key contributors to its competitive advantages are not wholly disclosed to the foreign partner. For example Coca-Cola presents its formula as a closely held trade secret known to only a few employees, mostly executives. 

Sensible tax policies are an attractive feature of many emerging markets. The highest tax rate in Brazil is just 27.5%. Flat-tax structures have become the norm in places like Russia, the Czech Republic, and numerous other countries that were once behind the Iron Curtain.  Dynamic Asian markets like Singapore, Malaysia, and Taiwan have long since done away with capital gains taxes.

One industry example is Brazil’s Net Servicos (NETC – news – people), the country’s largest cable TV and broadband Internet provider. Despite Brazil’s economic growth, only 10% of its 199 million citizens have access to these services. As disposable incomes rise, cable and broadband penetration rates will rise over time. Emerging-market telecom companies like Turkey’s Turk Cell ( TKC – news – people ), Mobile Tele Systems ( MBT – news – people ) in Russia, and China Mobile ( CHL – news – people ) are all direct plays on increased consumer cell phone service spending. Once an unaffordable luxury in emerging markets, mobile devices are fast becoming the primary means of communications for millions of consumers.

Developed countries are already benefiting from these emerging markets. German investments abroad, specifically by the automotive and chemical industries, have flourished by moving production out of the country. Both cars and chemicals have seen continuous growth abroad since 1994 and the profits have boosted the bottom lines of German-based companies as a result.

Japanese investors are using their unusually strong yen to buy high yielding/high growth emerging market currencies, emerging market stocks, and emerging market bonds.  With government support, French nuclear energy (Areva) and aerospace (EADS (Airbus)) giants are investing in joint ventures with China, Eastern Europe, and The Middle East.

Emerging markets still have a lot of room to improve in key areas like corporate governance, transparency, quality of management and entrepreneurship.  However, the future has never been brighter for the emerging-market businesses and there are plenty of ways to invest and take advantage of this growth.