IMF/World Bank 2010
Investing in emerging markets has always been a pursuit best avoided by the faint-hearted. Typically boasting less liquidity than developed markets, and usually backed by less robust and diversified economies, they are renowned for their volatility. As a place to invest or set up a business, many have excessively complex legal and regulatory systems, among other assorted hurdles to doing business, that dissuade any but the specialist from participating.
The performance of emerging markets as an asset class during the credit crisis showed that such considerations remain relevant, despite the progress many countries have made in modernising.
But at the same time, there is no doubt that the status of emerging markets has changed. Many are proving well-equipped for the challenges presented by the global economy. Others are certainly in a far more precarious position, and will struggle to cope with declining demand from developed economies when they have made so little progress in developing their domestic markets. A growing mood of protectionism threatens to exacerbate these problems.
It should be emphasised how broad the emerging markets stable is. The BRIC countries have more in common with developed economies than they do with frontier markets in Africa, for example – and as much in common with developed economies as those economies have with each other. China’s recent overhaul of Japan as the world’s second biggest economy in dollar terms suggests the diversity of emerging markets will only increase, as other large EMs overtake established but weary Western economies.
One of the perceived risks binding many emerging markets together is political risk. And nowhere has this risk been better exemplified than in Thailand, for so long viewed by investors and backpackers alike as being a stable, prosperous economy, where political turbulence was unlikely to become a major threat. In fact, Thailand’s political strife has had minimal impact on its ability to finance itself, and some have argued it makes it an even more compelling opportunity, with fewer dollars chasing the many good opportunities presented there.
A quite different case is that of Argentina, a country that, while politically stable, became synonymous, in many investors’ minds, with risk. The memory of its default remains fresh despite the passage of time, but Argentina’s exemplary behaviour as a financial partner in recent years has started to reap rewards. The country has recently become not just a credible investment but an investors’ darling. Its journey is a testament to an economy’s ability to turn its fortunes around, as well as to the pragmatism and open-mindedness of investors.
Other exciting and dynamic emerging markets include Turkey and Poland, both featured in this report. Both weathered the most harrowing affects of the credit crunch and financial crisis, having well-managed economies and young populations. Both also have plenty of room to develop bank products for their domestic populations and businesses.
But most emerging markets are not commodity-rich, strategically vital or demographically blessed. In most, investment is still virtually inaccessible to the majority, creating a vicious cycle of dependence and poverty. In such markets, a different form of financing is required. The microfinance industry has made great advances in allowing entrepreneurs to flourish in otherwise unbanked corners of the world, but more work is needed to ensure such funds continue to percolate down to the lowest levels, and do not concentrate on the easiest-to-reach markets.