It was about one year ago when I started the blog. Emerging markets investing is my passion, and I have written several books and contributed to magazines and newspapers on the topic, both now and in the past. These grew mainly out of my desire to introduce investors to the exciting and rewarding realm of emerging markets.
Blogging has given me a new avenue for sharing my thoughts and perspectives on emerging markets, on a more regular basis and to potentially new audiences. While social media in all its forms is one of the most popular and fastest growing arenas on the web today, it is still considered a ‘frontier market’ for many, especially in the corporate world. As a frontier market investor, I was very happy to give it a try, and have found the experience very rewarding, especially in reviewing all of the readers’ comments!
Going back to the concept of frontier markets – be it investing or entering a new field, I believe that the better one appreciates the inherent risks in the ventures, the better one would be able to potentially benefit from the upside and avoid the danger areas.
Over the years, investors have grown more open to investing in emerging markets like Brazil, China and India. However, there continues to be some misperceptions about investing in frontier markets.
In general, frontier markets are defined as the ‘next’ emerging markets. The economies are more domestic-oriented with a limited number of publicly listed companies; hence, frontier market investments tend to be primarily limited to private equity. A frequent concern quoted by investors is about the quality of the company management. Frontier market investing often requires additional time and due diligence to assess the quality of the management team including more frequent on site visits to evaluate the business effectively. That said, whether in Nigeria, Kenya or Vietnam, we have found that more and more companies are led by a management team that has been educated in the West at academic institutions like a Harvard or London School of Economics.
Here are my responses to recent questions from readers.
1) Many IPOs tend to have a small initial surge and then taper off for a period of time. Stock sales seem to be driving the IPO thinking, do you think these companies have plans to manage growth and incoming capital, to avoid the company stock tapering off?
- Russ, Canada
The initial public offering (IPO) and secondary issue activity in emerging markets has accelerated as a result of the higher prices for emerging markets (EM) stocks. In 2009, about US$240 billion in IPOs and secondary issues were made in emerging markets. This year, we expect that amount to potentially double. Raising capital in such instances is often opportunistic. These companies may feel that when stock prices go up, it is a good idea to raise money, even though they may not have a specific reason other than to “pay off loans” or “strengthen the balance sheet”. In some cases, additional capital is not needed and tends to dilute earnings. This is why stock prices often taper off after an IPO or secondary issue.
This week, our Malaysia office goes into full operation. We celebrated this significant milestone by having a dinner, and hosting over a hundred guests. It was a lovely evening, and I was honored to be in the presence of many dignitaries and key clients. I was also able to share with the audience my perspectives on emerging markets investment, which is significant and growing rapidly. I would say it appears to be a bull market now.
More money will be directed into these markets when investors realize that they may be able to buy good value stocks at reasonable prices with relatively lower risk, compared to developed markets. As an emerging market, Malaysia presents itself as a very attractive investment destination today. The Malaysian consumer and commodity stocks are attractive and interesting. I am expecting a domestic GDP growth of 6% this year. More importantly, I’m looking forward to being directly involved in managing Shariah-compliant strategies, which aim to be fully compliant with the principles of Islam. Our team is very familiar with Shariah-type investments as we have been investing in Pakistan, a Muslim country, since 1993.
The principles of Shariah investing are very much in line with equity investing and particularly ethical equity investing. The demand is growing for Shariah-compliant products for the increasing number of Islamic investors around the world – particularly from the Middle East. Malaysia serves as a good platform to engage this group of investors, many of whom cannot invest in non-Shariah compliant products.
Recently, Franklin Templeton opened an office in Bucharest to begin managing a significant mandate from the Romanian government, Fondul Propietatea. It is a mandate with the unique objective to compensate Romanians whose property and assets were seized by the country’s former communist regime. Over the last year we have been visiting many companies in Romania and believe that a number of them could benefit from privatization.
I’ve often stressed my strong belief in the merits of privatization. In my opinion, privatization brings positive development for emerging and frontier markets. It makes companies more attractive to investors, including foreign investors, and leads to higher efficiency, which can lead to higher profit margins. In the past, I’ve seen that privatization not only boosts local stock markets but also benefits the domestic economy.
In my view, privatization in Romania is no exception and would help their market become more liquid, efficient and productive. Greater transparency, higher reporting standards and more opportunities to invest should attract both local and foreign investors to the Bucharest stock exchange. The market is currently dominated by Romanian residents, who made approximately 70-80% of the exchange’s trade volume in 2009, but foreign investors play an important part as well. Although they accounted for only 20-30% of trades that year, they are often seen as trend-setters.