What investors thought about emerging markets two decades ago, does not reflect what it represents today. The emerging markets landscape has drastically evolved as evidenced by the vast differences between countries. Therefore, it’s now more appropriate to examine emerging markets on a country-by-country basis, rather than lumping them all into one market category.
The following are a few material points investors may consider as they explore the opportunities and risks of today’s diverging emerging markets.
Social media: The difference between emerging markets today compared to the 1990s is the rise of social media. This virtual interaction has the potential to help align emerging market governments with the economic interests of their citizens. Over time, I think there is a better chance of countries being better aligned with companies to achieve what they want to achieve. History is full of bad examples of where a dictator invites companies in, and lo and behold leaves the country 10 years later with all the cash. Today, I think there’s more transparency and accountability around those types of political risks thanks to social media.
Unique factors: When evaluating companies, there are universal characteristics that are important no matter where they’re located — earnings, valuation and fundamentals. But context can be critical, and unique factors in emerging markets warrant extra attention. If I am looking at an asset in Mongolia, versus an asset in Canada or the U.S., there are two totally different discount rates that I would use to account for geopolitical risk.
Political influence: Politics doesn’t have to reach the level of civil unrest to impact emerging market growth. For instance, Petrobras, the national oil company in Brazil, has to continually ratchet down growth expectations in its five-year plans. That is simply because of government policies that mandate that the companies producing the oil use local suppliers. Attaching this local content onto the different companies operating in Brazil has really hurt them because the Brazilian companies just haven’t been able to compete. By trying to benefit the country, they have actually ended up hurting the country. That’s one thing that I continue to keep an eye on. It is a systemic and geopolitical issue all wrapped up into one.
Feel free to leave any comments or questions that you may have regarding the discussion above.
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Note: The company mentioned in the above article was selected for illustrative purposes only and is not intended to convey specific investment advice.