Investment Adventures in Emerging Markets

Evolution of Emerging Markets

Hong Kong, 1969 — the year I started my first company. It was a consulting firm helping Western companies that were venturing to Asia. Who would have thought that almost 20 years later, I would receive a call from Sir John Templeton to help him start a dedicated emerging markets portfolio management team. That’s how Hong Kong, one of the greatest cities in the world, became the first Templeton office outside of U.S.

We were the pioneers in this field. There have been incredible changes in emerging markets since we started in 1987. The term “emerging markets” was only coined in the late 80s by the International Finance Corp, a unit of the World Bank. Prior to that, they were all derogatory like “under-developed” or “third world”, which never really fully described all the opportunities that were bubbling in those markets.

The old Haw Par Villa in Singapore, built by the founder of the Tiger Balm ointment
The old Haw Par Villa in Singapore, built by the founder of the Tiger Balm ointment

Just take a look at Singapore, it broke away from its British colonial master in 1963, became an independent republic in 1965 and within a span of 40 years, achieved “developed market” status, as defined by MSCI. I recently met up with the founding father of modern Singapore and its current minister mentor, Lee Kuan Yew, and we discussed the changes that we had seen in the region and globally.

In the early years, the number of countries in which we could invest in was only 5. Today, it’s over 40. The number of companies has also dramatically increased by over 20-fold and of course, the market capitalization of those companies and countries has increased dramatically. It was, however, a difficult time. In those days, although there were many emerging market countries in Asia, Africa, Latin America and Europe, very few of them were open or large enough for investment.

There were strict foreign exchange controls and limitations on foreign investment, in addition to the plethora of problems of safekeeping of securities and market liquidity. We had to spend time setting up the basic infrastructure for operations and trading, which were mainly non-existent in those markets. Nowadays, foreign investors can easily invest in whatever stock they want and it’s all taken for granted.

Progression in investors’ attitude towards emerging markets investing also supported the growth and expansion of the stock markets in these countries. Initially, investors had a more apprehensive attitude towards investing in regions outside of the typical developed international markets such as the UK, Germany, Japan, and so forth. This was because emerging markets offered different challenges to those that were present in developed markets. Those challenges were often also much more diverse than those encountered in traditional investment arenas. They included concerns such as a lack of proper regulation, paucity of information and transparency, political turmoil, social and economic instability, foreign investment restrictions and currency devaluation. While some of these risks still exist, they are not as prevalent as they were in the 1980s and 1990s.

The U.S. Corporate Accounting scandals at the start of the new century and the recent Bernie Madoff incident illustrate that such corporate governance issues are not limited to emerging markets. It can happen anywhere, only meticulous research and proper due diligence can help to prevent investors from falling prey to such scams. If the risks of investing in emerging markets can be properly assessed and managed, they can potentially provide commensurate returns.

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