Learning from Past Crises
On the heels of the global financial crisis, as Europe discusses the implementation of painful austerity measures and the U.S. deliberates the continuation of expensive government spending, I cannot help but draw attention to the relatively good fiscal health of several emerging market countries. While many investors across the globe continue to think of emerging markets as ‘backward’ compared to developed markets, I think this is somewhat of a misperception based on impressions from decades ago. Per capita income in some emerging markets may still be lower than that in developed markets, however on several other measures, some emerging markets actually look healthier than some developed markets.
In the mid-1990s, some emerging markets substantially relied on foreign financing, making these countries more vulnerable to shifts in foreign expectations and perceptions. Consequently, they experienced serious financial crises, such as in Asia in the late 1990s and in Latin America in the early 2000s. These crises brought sharply into focus the risks and costs associated with underdeveloped domestic markets and excessive reliance on external, foreign-denominated debt.
Private and Public Sectors – Motivating and Regulating Markets
Even though the government and the private sector have different roles in society, I believe both must depend on a capitalist philosophy in order to be successful. When capital is raised, be it from taxes or from the savings of individuals for investment, it must be put to productive use. Simply put, the capital must result in higher productivity, that is, there should be more goods and services produced for less capital. This translates to higher profitability. However, government organizations are often found to be less efficient in making that transformation because there are few incentives to do so. In comparison, the private sector is mostly driven by profit motives and incentives.
I believe having a motivating factor is fundamental for success and can garner remarkable results. In order to create motivation, government organizations could implement incentives for good performance. This could result in generating higher productivity among government workers, and in turn, they may be able to put capital, in the form of taxes, to better use. We have already seen some governments around the world privatize firms, implementing profit incentives within those organizations, often with stellar results.
Russia: Insights from Templeton’s Emerging Markets Analyst Conference
We just had our semi-annual analyst conference in Romania last month, and given our proximity to Russia, the giant in Eastern Europe, that was naturally a topic for discussion. Here, Gennady Zhilyaev, our Russia-based investment analyst, shares some of his personal insights on the country.
By Gennady Zhilyaev, Deputy Director, Templeton Emerging Markets Group
Russia is the world’s biggest exporter of natural gas and the second-biggest exporter of oil.[1] It is also the third-largest exporter of steel and primary aluminum.[2] However, it was one of the hardest-hit countries during the recent global economic crisis, largely due to its huge dependence on commodity prices. Oil prices plummeted and rating agencies lowered their credit ratings on several Russian banks, while the country’s GDP shrunk by 7.9% in 2009 and stock prices plunged significantly from their peak.[3] The government had to recapitalize the banking system and bail out several large state companies, thus putting further pressure on its own finances.
Many companies are still reeling from the aftermath. Some media reports indicated that the number of Russian companies that filed for bankruptcy rose by 15% in 2009, but I believe that correlates with the recent economic downturn, and it follows a global trend.[4] During the thriving years of economic growth, we saw many start-up companies emerge, flourishing in a very favorable environment. However, tested in challenging times, some companies’ business models turned out not to be viable and failed to see them through.
The Emerging Markets IPO Frenzy
Privatization of state-owned enterprises has been a key catalyst in unlocking the market potential of emerging economies. Personally, I believe that listing on stock exchanges or allowing market forces to work can ensure greater efficiency in effective resources deployment.
In recent years, we have seen a rise in initial public offerings (IPOs) in emerging markets (EM) as EM companies begin to recognize the advantages of going to the market to raise capital in order to expand and grow. At the end of 2009, emerging markets IPOs represented about 70% of all global IPOs, as compared to about 20% in 2000.[1] During 2009, the amount of IPO money raised in emerging markets rose steadily. Total funds raised were about US$87 billion. [2]
The flood of emerging markets IPOs was also largely fuelled by excess liquidity in the global markets. There has been a dramatic increase in the money supply in the U.S., China and other countries. As a result of the current low interest rate environment and less attractive growth prospects in developed countries, investors look to emerging markets to seek better yields for their cash.
Although the large amount of IPOs in the market is a reflection of emerging markets’ strength, this huge pipeline may also put downward pressure on the markets as money could be diverted to new issuances, away from existing shares in the market.
Readers’ Questions Answered Part IV
Here are my responses to recent questions from readers.
Can you comment on Brazil? Where do you see Brazil 10 years from now?
- James, United States
Brazil is a key producer and exporter of commodities. Strong commodity prices associated with a solid domestic demand for goods and services have been key drivers of its economic growth. Hence, it is likely to benefit from rising global demand, including demand from China, for energy, metals and other commodities.
Brazil is also a country with a large, growing consumer base. Brazil’s economy is diversified and largely domestically driven, with exports accounting for less than a quarter of GDP. This domestic strength is one of the reasons for the Brazilian economy’s relatively faster recovery compared to most other globally-exposed economies. Its big consumer market creates opportunities for a wide range of firms, including financial services providers, health care firms, cosmetics companies and beverage manufacturers. In addition, Brazil will be hosting the FIFA World Cup in 2014 and the Olympics in 2016, hence, it is expected to invest significantly in infrastructure that should help drive economic growth in the coming years as well as improve the basis for stronger sustainable growth in the long-term.
The Pride of Slovenia
I once asked a group what the difference between Slovenia and Slovakia is. Many were stumped. The former, famous for subterranean caves and the latter, for its impressive mountain ranges, couldn’t be more vastly different, despite the similar sounding names. This would prove to be even more evident when we recently landed at Ljubljana, the capital city of Slovenia.
Slovenia’s location is quite advantageous, bordering Austria, Italy, Croatia, Hungary and the Adriatic Sea on the southwest. The majority of its population is made up of ethnic Slovenians but there are minorities of Hungarians, Italians, Serbians and others. The South Slavic language, Slovene, is the official language but German and Italian are widely spoken along the Austrian and Italian borders.
Slovenia has a population of about two million and is relatively wealthy, with a GDP per capita of over US $27,000. A former republic under Yugoslavia, Slovenia was declared independent in 1991. In 2004, the country joined the North Atlantic Treaty Organization (NATO) and the European Union (EU), and in 2007, joined the Euro currency union. Just like other countries in Europe, Slovenia’s economy was recently hit by the market crisis. The country’s GDP contracted by 8% in 2009 after having risen 4% in 2008 and almost 7% in 2007. However, things are looking up this year, and we are expecting a modest recovery of a 1% increase. Inflation has been on the downtrend, falling from a 2000 high of 9% to a little over 1% this year. Trade equals about 120% of GDP (exports and imports combined) with about two-thirds of Slovenia’s trade with other EU members.[1] During the last decade, privatizations have been carried out in the banking, telecommunications and public utility sectors.
Focus on China: the Renminbi, Commodities and Real Estate
Developments over the last few weeks have once again brought China into focus. China recently announced that it would increase the flexibility of its currency, the renminbi (RMB). I recently said that an impending renminbi appreciation should not have a dramatic impact on Chinese stock markets since the exchange rate change was likely to be gradual. Indeed, from our observations since the announcement, the currency’s rise is likely to be gentle and controlled as the Chinese authorities carefully monitor its movement.
Since we expect the exchange rate change to be gradual, this move does not dramatically change our overall outlook on Chinese stocks, which we think should perform well in the medium term. We are still able to selectively find some attractive stocks on an individual basis, with companies related to the commodities and the consumer products and services sectors seeming to offer more interesting opportunities.
World Cup Fever in Africa
The newly-completed Cape Town Stadium, where the FIFA World Cup 2010 matches are being held.
I’m sure a number of you have been keenly following the World Cup matches as they play out across South Africa. For me, even though I was sitting far away, the opening match in the awe-inspiring Johannesburg venue felt especially close to home, since we have an office in this city originally called the “Place of Gold”
We have been coming to South Africa for several years, and we also have a number of South African companies in our portfolios, so we rejoice along with the South Africans that they are hosts of the FIFA World Cup 2010. In our opinion, the country has many world-class companies that present good investing opportunities. These companies have capable management teams and many are expanding their international market share. Higher global demand for commodities, a recovery in domestic demand and the hosting of the World Cup should further support South Africa’s economic resurgence this year.
A number of sectors could benefit from the World Cup, most notably those related to infrastructure, tourism, retailing, media and telecommunications. This is the first time the World Cup has ever been held on the African continent. The fact that the World Cup occurs in South Africa could enhance the country’s image and improve the world’s perception of South Africa, as well as potentially attract more tourists and investors to the region.
Insights on Hungary
Following the recent Greece crisis, there have been several concerns raised about the debt situation in Hungary.
The Hungarian market was one of the top performers in Eastern Europe with the MSCI Hungary Index returning 78% in US Dollar terms in 2009. The market significantly outperformed its regional peers – Poland and the Czech Republic. In the first five months of 2010, however, the market was down 12% in US Dollar terms, mainly due to a 23% decline in May alone on concerns that Hungary could face similar financial problems as Greece.[1]
Although the ratio of government debt to GDP is relatively high at 78.2% when compared to other emerging markets, it is not as high as levels reached by some developed nations recently. Greece, for example, has a public debt to GDP ratio of about 117% and recorded a public deficit of 14% of GDP last year. This compares to a deficit of 4% of GDP for Hungary.[2]
Addressing Investor Concerns after Heightened Volatility
Investors’ concerns have risen after seeing news of political unrest in Thailand, tensions in the Korean peninsula and sovereign debt issues in parts of Europe. I’d like to share with you some of the questions that our investors have been asking and responses to them from my emerging markets team.
With all the news coming from Europe and Asia, there are renewed talks of a double-dip scenario. Do you think this is likely?
We believe a double-dip scenario is not likely right now since we have seen tremendous efforts on the part of governments globally to avoid another downturn, by keeping money supply high and interest rates relatively low. Now, there is a tradeoff between loose monetary policy and the possibility of inflation, and so in some cases authorities are allowing yields and interest rates to creep up slightly. But generally speaking, the mode of operation in Europe and the U.S. is to ensure high liquidity.
Follow Mark
Share This
