Emerging Markets by Lyonsdown

Economics

Forecast

Finance

Bric-a-break?

A world of worry

Investing for dummies Look at us now

Is the golden wall of expectation starting to fall apart? | Page 6

How Russiaâ€™s re-election and bribery in Pakistan can affect investments | Page 8

Your step-by-step guide to making money from emerging market routes | Page 11

November 2012 | business-reporter.co.uk

Case studies

How three men used their market expertise to start afresh | Page 13

EMERGING MARKETS

Beyond BRICs The new emerging markets give Brazil, Russia, India and China a run for their money Distributed within the Sunday Telegraph, produced and published by Lyonsdown which takes sole responsibility for the contents

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Business Reporter · November 2012

Emerging markets

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In brief

Best of the blogs

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Business Reporter’s online editor, Gareth Corfield, rounds up the best blogs on the web for insider tips and tricks on the emerging markets sectors

an independent report from lyonsdown, distributed with the sunday telegraph

Who? Beyondbrics, Financial Times The excellent Beyond BRICS blog from the Financial Times covers emerging markets beyond the BRIC (Brazil, Russia, India and China) markets which make up the bulk of coverage in this sector. Outside of the FT’s usual paywall structure, this blog is essential reading for a mature, informed and credible approach to these rapidly expanding markets. What? ‘S&P Dow Jones launched its SMIT 40 Index on Monday, covering shares in 40 companies from South Korea, Mexico, Indonesia and Turkey, reflecting growing interest in emerging markets beyond the BRICs. ‘From each of the four countries, the top ten companies by float-adjusted market capitalisation will be included, given they meet the eligibility criteria of a three-month average daily value traded above $5m and market capitalisation above $1bn.’ Where? blogs.ft.com/beyond-brics/ Who? ISI Securities Emerging Markets Written by the in-house team at ISI Securities, their emerging markets blog combines marketfocused insights with expert analysis of rising trends – and the underlying data – in the economies they focus on. What? ‘Indonesia Data Talk: Growth in Indonesian wheel sales by volume was lower in 2011 than in the previous year. Wheel sales rose by 4.06 per cent during 2011 versus 32.37 per cent during 2010. The subdued trend in wheel sales coincided

with reduced growth in wheel production and in motor vehicle production during the same period. Growth in wheel production declined to 3.47 per cent in 2011 from 33.88 per cent during the previous year, while motor vehicle production likewise cooled to a modest growth of 19.28 per cent in 2011 compared to 51.14 per cent during the previous year.’ Where? http://blog.securities.com/ Who? Forrester’s Emerging Markets Blog This monthly blog from IT consultancy Forrester takes an in depth look at different emerging market sectors. From casting a spotlight on emerging IT markets showing business potential to examining B2B initiatives in emerging economies, this blog presents relevant, concise business information aimed at the pressed-for-time senior executive. What? ‘In 1974, an Indian Bollywood Hindilanguage film was released with the title Roti Kapda Aur Makaan (English translation: Food, Clothing and Shelter), referring to the bare minimums of life. If it were to be released today, the director of the movie would need to add the word Internet to the title because access to the Internet has become a necessity for many people over the past decade.’ Where? http://blogs.forrester.com/ category/emerging_markets Who? Information Security in the Emerging Markets

Brian Contos, senior director of emerging markets and vertical solutions at IT security software company McAfee, takes a bi-monthly look at information security within selected emerging markets. Presented as a brief overview aimed at the non-specialist business reader , this blog is good reading for executives considering expanding into new markets. What? ‘Malaysia has seen tremendous growth, with an average 6.5 per cent annual GDP growth rate for the past 50 years. It is one of the largest exporters of electronic and information technology-related products, and nearly 100 per cent of their GDP is from exports.’ Where? http://blogs.mcafee.com/tag/ emerging-market-security Who? International and Emerging Markets blog – Grant Thornton This regular blog from accountancy firm Grant Thornton mostly covers the BRIC economies but also other emerging markets. With a blend of interviews, expert comment and thought leadership pieces, this blog is a dependable source for keeping one’s finger on the pulse of emerging markets worldwide. What? ‘Despite the eurozone crisis, mainland Europe still offers opportunities for competitive advantage, according to our updated business relocation guide for 2012/13. Here we list the ten most favoured European countries to relocate some or all of business operations to.’ Where? http://thinking.grant-thornton. co.uk/emergingmarkets/index.php

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Business Reporter · November 2012

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Emerging markets

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What’s inside? Riding high

rands maker of b Diageo, the irnoff and inness, Sm such as Gu ed a alker, report p in Johnnie W lea r a e -y year-on gust 32 per cent u A in ts fi first-half pro uted in part to ttrib to £3.1bn, a isitions in s and acqu le strong sa arkets emerging m hilips saw a company P ets in Electronics erging mark ith Nestlé saw boost in em ,w 12 0 2 f o sales in em arter . a m erging re arkets rise a the third qu t a nt in th 12.9 per ce ce r e p 10 p fi a rs n d t in the t e h rt a o sales u lf p o re f 2012, com company pared to ju 2.6 per ce Overall, the 220.1m (£137m) st n t in develop f$ ed nations This contr net profit o r e ib . rt u a te u q d to an 8 for the rise in net profits to C .9 per cent HF 5.1b company re ported in A n, the ugust

$220m

6% growth r a 6 pe ibuted evenue r t t a gr Cola Coca- in operatin st quar ter e fi is r e th r ging ce n t 8bn in th in emer , .9 6 £ – to grow ndia larly I 2 – to of 201 ets, par ticu razil mark ina and B Ch

Emerging Market Experts

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The Emerging Market Experts app from Mirae Asset Financial Group includes a daily infographic; a weekly commentary on the outlook for the BRICs; a currency converter and other useful tools for investors.

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On the record

Investing in Emerging Markets: The BRIC Economies and Beyond, by Julian Marr and Cherry Reynard, £22.74, Amazon

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Developing countries are unscathed by the “deflationary debt trap that the developed world is falling into. Billionaire financier George Soros to the Wall St Journal in December 2011

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Nearly $100 billion a quarter going to emerging markets over the last 12 months. I think that can only continue. By 2013, it would be no surprise if lending to EMs hit record highs. Renaissance Capital’s global chief economist Charles Robertson to CNBC in December 2011

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Back in the office: reading list

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In recent years, we have seen more opportunities outside the US. We continue to look at the large countries like India because we need to make large commitments to make them meaningful for Berkshire Hathaway and India is a very logical place to look. Warren Buffett on his first trip to India in 2011

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Overseas investing is a risky business Page 8

The potential and the pitfalls of different investment routes Page 11

Advertisin g downward group WPP bucke d the trend in th 2012, with e a 7.6 per c first quarter of £2.4bn, a ent rise in ttributed sales to to markets, particularl grow th in emergin g y Latin Am erica and Asia Pacifi the c region

BEST APPS FOR INVESTORS

FREE

How Mexican markets could overtake the BRICs Page 5

Investing in Emerging Markets: The Rules of the Game, by William B. Gamble, £13.59, Amazon The Emerging Markets Century: How a New Breed of World-Class Companies is Overtaking the World, by Antoine van Agtmael, £2.74, Amazon

One investor’s journey from Goldman Sachs to the vineyards of Argentina Page 13

With thanks to the following organisation

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Industry view

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Rich pickings Emerging markets really can be the jewels in an investor’s crown. Choose carefully and you can really add value to your multi-asset portfolio INDUSTRY VIEW

arely was an abbreviation more apt. GEMs, or global emerging markets, can indeed become some of the gems in the portfolios of discerning investors – as long as they exercise a little nous. ‘We’ve had 20 to 30 per cent of our equity exposure in Asia and GEMs since we launched our multi-asset class strategies in 2004,’ says Andrew Wilson, Head of Investment at wealth adviser Towry. ‘We were excited by positive demographics and improving corporate governance, balance sheets and political stability. Return on equity was improving and sustainable, while valuations were cheap compared with the developed world.’ But GEM opportunities are far from homogenous, and it pays to diversify in terms of asset class, sector, geography and currency in order to damp down risk, adds Wilson. And as investment values have risen almost en bloc over the last decade, GEM stocks are no longer universally under-valued, forcing today’s investors to make more calculated decisions to maintain performance. ‘The exciting part of the story now is often about domestic consumption and the rise of the middle classes,’ says Wilson. ‘You need to

be more wary of ‘traditional’ investments such as major exporters, energy and financial companies, which may not be as fast-growing as stocks that rely on internal sales.’ A more conservative alternative could be to invest in stocks that are listed in developed countries, but whose marginal growth is driven by GEM sales, such as Estée Lauder, SABMiller, BAT, Unilever and L’Oréal. ‘Markets have underestimated marginal growth from Asia and GEMs, and how sustained this could be,’ says Wilson. ‘This might be appropriate for investors who are nervous about investing on GEM stock exchanges, although of course they wouldn’t get the pure play advantage of the GEM story.’ Demographics are a close focus for Towry’s analysts. ‘There’s clear evidence that population growth supports a rise in assetclass returns,’ says Wilson. ‘But it’s not universal. Countries such as

‘Markets have underestimated marginal growth from Asia and GEMs, and how sustained this could be’ – Wilson

India, Vietnam, Indonesia, Thailand and Burma have young populations and growing incomes, but China and Russia are ageing faster than they’re growing wealthy, so it pays to be selective.’ The maturity of many GEM markets is reflected in attitudes to governance and dividends. ‘Corporate governance is not as good as in the developed world but it is improving, and emerging markets have an increasing number of investment grade members,’ says Wilson. ‘This is especially true in countries like India which have an Anglo-Saxon legal heritage. ‘And a lot of stocks in Asia and GEMs now pay dividends greater than inflation or the returns you can get from government bonds in developed markets, so investors seeking income are no longer restricted to markets such as the UK. Asian income funds are already being launched to take advantage of this trend.’ Now that the effects of inflation, or even the threat of default, have taken the shine off government debt in many developed-world economies, GEM debt is becoming quite an attractive option, too. ‘Some GEM governments have sounder balance sheets and sounder fiscal policies than

Countries such as India have young populations and growing incomes

many developed markets,’ says Wilson. ‘On many metrics they should be safer, and in total GEMs account for more than 20 per cent of the global debt market. ‘Mexico, Brazil, South Africa, Indonesia and Thailand are all investment grade now, and you should be looking for yields at least 3 per cent better than markets of the calibre of the UK, USA or Germany.’ With debts in local currency rather than dollars, yields can be even higher, Wilson adds. ‘Local currency debt is shorter duration and higher yield, and has the potential benefit of appreciating currencies with strong fundamentals. ‘However, local currency GEM debt does still remain a “risk on” asset, so it’s not a short-term or low-volatility option. It needs to be carefully blended into multi-asset portfolios.’ www.towry.com

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It’s the new BRICs on the block Forget Brazil, Russia, India and China - their ship has sailed. Get ahead by looking further ashore to these emerging countries Poland

Poland presents a good medium term investment on two fronts: it has a manufacturing sector which could pick up in the future, but it also has good prospects in the consumer-facing industries. The country has a growing middle class and increasing consumer wealth – indicated by its GDP per capita, which has steadily risen and was put at $6854 (£4,280) in a 2011 report published by the World Bank. Income is also boosted in part by remittances from Polish workers based abroad. The economy has grown well, partly because of a hefty fiscal stimulus in 2009, but growth is slowing because of problems for Germany and the eurozone, who are big trading partners for Poland’s manufacturers. The country has not helped itself by concentrating its trading partnerships within the eurozone. It is expected to grow by 2.5 per cent over 2012 – but over the course of the next five years this could be boosted by a growing consumer base and, with luck, a healthier Europe.

Vietnam

Turkey

Like many of the emerging markets, Vietnam is expecting growth and a potential consumer boom. The economy should grow by around 5 per cent this year, according to the World Bank. And like a number of emerging markets it has a population which is becoming wealthier as well as a capacity for credit deepening – two things which could boost domestic demand for goods. This may be good for investors, but not immediately. This is because issues still need to be resolved – inflation, which got as high as 23 per cent in August 2011, threatens to dampen market and consumer confidence, and the Vietnamese Dong has been volatile, which will fail to inspire confidence. This could be an issue if Vietnam needs to let its currency depreciate – the option will backfire if people are using other, more “credible” currencies for debts and investments.

Turkey has made more structural reforms in the past than other large emerging markets, to its advantage. In 2003 it took measures to encourage foreign investors, including cutting red tape and putting domestic and foreign investors on an equal legal footing. It is expected to grow by three per cent in 2012, and is well placed in terms of trade – its manufacturing sector exports not only to the eurozone, but also to the Middle East. Its trade with the Middle East involves ups and downs – volatile Iran is one of its big markets – but could reap big rewards in the future. It has already seen hints of this, with the Arab Spring leading to capital flight from Egypt to Turkey. But Turkey has its own economic Achilles heel. It has a large current account deficit – reported as equivalent to $3,856m (£2,405m) in July – which is funded by the country’s growth but could still get out of hand.

£4,280 GDP per capita

Mexico

Ghana

+ 14.4% in 2011

Mexico was hit hard by the 2008 financial crisis, partly because of close ties to the American economy. According to the Organisation for Economic Co-operation and Development, private consumption there fell by 7.4 per cent in 2009, accompanied by a 13.6 per cent drop in exports. But circumstances have steadily improved – private consumption rose by 5.3 per cent in 2010 and by 4.6 per cent in 2011. Exports rose by 21.7 per cent in 2010 and 6.8 per cent in 2011, and Mexico is now grabbing some of China’s market share in America. The economy shows promise: there are benefits in being closely connected to the US economy as it appears to improve, high oil prices are boosting Mexico’s public finances and there is talk of reforms such as allowing foreign ownership of the resource sector. There is also scope for a booming consumer sector: credit levels are low and GDP per head is high at $10,000 (£6,235), compared to India’s meagre $1,100 (£685).

After Ghana saw impressive growth of 7.7 per cent in 2010, oil production lifted this further to an average of 14.4 per cent for 2011. Ernst & Young predicts future growth will be “robust” if somewhat slower, at around 8.5 per cent for 2012 – with predictions for 6.9 per cent in 2013 and 5.6 per cent in 2014. Like other African nations including Nigeria and South Africa, Ghana shows promise because of its commodities. There has also been the boost of Chinese investment across the continent, as the country looks to buy up resources. But Ghana has problems with inflation, which averaged 8.7 per cent in 2011, as well as a current account deficit which makes up around 9.4 per cent of GDP, and these could make the economy volatile.

+8.5% i

n 201 2

Indonesia

Indonesia’s economy struggled in the early 2000s up until around 2005, but has performed well more recently. In 2009 it grew by 4.6 per cent despite global conditions, and has grown by around 6 per cent in 2010 and 2011. Its GDP per capita has passed the $3,500 (£2,180) mark – a point at which the middle class tends to grow, leading to demand for durable goods such as cars and refrigerators. So there is scope to invest in the country’s consumer-facing sectors. But investors do need to watch out for signs of overheating – Indonesia is increasingly gearing itself towards a consumer-based economy and there are concerns that rocketing demand could exceed supply, leading to volatility.

2009

+4.6% 2010

+6% 2011

+6%

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Emerging markets

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Political and economic factors are slowly crumbling the builtup hopes of the BRIC countries By Dave Baxter

Brazil Like all the BRICs, Brazil is having a worse year than expected, with its problems being put down to a mixture of domestic and external issues. The country is suffering from slowing growth – Pablo Goldberg, global head of emerging markets research for HSBC, describes forecasts of 1.7 per cent growth for 2012 as ‘much worse’ than the bank’s initial predictions. The manufacturing sector is slowing down in particular, as a result of changes in the exchange rate and the growth of wages. The Brazilian Real has depreciated significantly against the US Dollar over 2012, moving from between 1.7 and 1.85 against the dollar to between 2 and 2.8 to a dollar. This has also hurt the equity market for investors, because it lessens returns into their currency. Goldberg believes the Brazilian economy could be close to ‘turning the corner’ and growing impressively – but fears runaway inflation could cause this to lag. Others are more optimistic: Brian Coulton, emerging markets strategist for global investor Legal and General Investment Management, thinks the last two or three months have shown an upturn for Brazil, and expects a boom in areas such as retail sales and capital goods.

Business Reporter · November 2012

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It could also pay off to step into sectors where the government is trying to cut down – it currently spends significant amounts on subsidies, wages and pensions, and is looking to get the private sector more involved.

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open an extra $5 billion (£3.1bn) in government securities to registered foreign institutional investors. And the government voted through plans to open up the pension sector to foreign investors by approving 49 per cent foreign direct investment in insurance companies. Similar liberalisation is planned for sectors including airlines and broadcasting. So there could be significant rewards in a number of consumer-facing sectors. But there are questions over whether the government can actually implement these reforms, and any potential benefits may be five to ten years in the making.

Russia Russia is predicted to grow more than Brazil over 2012 because of strong oil revenues – HSBC estimates growth of 3 per cent, and Coulton expects it to be as much as 4 per cent. But this would still be down on the year before, when the economy grew by 4.3 per cent. Russia had a tough recession in 2008, but since then banks and companies have paid off China a large amount of debt and now have more breathing space. China has the biggest market value out Access to markets has become better for of the BRICs – the MSCI Index, which foreign investors, and it is also one of the cheaper measures market performance of global BRICs to invest in. And there are areas with companies, rates it at $627 billion (£391bn), good potential for growth. which makes up 40.3 per cent of the market Real wages are strong, and in light share out of the four. China has of this Coulton would advise people But like the rest, it is slowing down: investing in Russia to get into HSBC forecasts 7.8 per cent growth consumer-facing markets. for 2012 , dow n f rom i n it ia l BRIC market But Russia is far from an investor’s predictions of 8.6 per cent. share playground – because of the political This is down from 9.3 per cent in situation there are very real risks. 2011, and 10 per cent in 2010. Growth in export of goods and services, On insurance broker Aon’s map charting political risk in 2012, the country is still rated which makes up 39.7 per cent of GDP, is in the medium risk category, and it is notorious slowing, according to figures from the for political risk and issues around corporate country’s General Administration of Customs. governance. Aon lists it as being prone to Exports rose 2.7 per cent year-on-year in political interference, supply chain disruption August to $177.97 billion (£110bn), which was weaker than expected. and legal and regulatory risk. Companies need to consider issues such But like India, this is a country with longas the possible confiscation or nationalisation term potential. of assets. And as with India, it isn’t completely The bottom line is that Russia has a lot to straightforward. As Chinese leaders set out in their last offer – but businesses could lose it all if they aren’t careful. five-year-plan, which charted the country’s planned economic route for 2011 to 2015, India there is a move towards rebalancing India is underperforming badly, China’s economy from being exportbut it could be one to watch for led to relying more on consumers Oil revenues the long term. HSBC expects 5.5 per to boost 2012 at home, with measures such as cent growth for India this year, but Russian growth by raising wages. there are reasons to be unhappy with If the economy does the current state of affairs. move this way over the Growth is slow for the country, and next five to ten years, inflation – recorded as 7.55 per cent in August investors would be wise – could drag this down. to focus on consumerfacing industries in And food and oil prices are already high, making it difficult for the country’s central China, which could see a boom. bank to pull back inflation by, for example, But as Coulton of Legal and changing interest rates. General notes, investors may find it But the government has announced a harder to get a grip on this than number of hugely important reforms to the China’s export boom – which saw economy, which, if implemented, could create it relying on other countries for a number of promising opportunities for vital technologies and resources. investors in the long term. He says: ‘I think China will These include moves to boost incentives and be better at making the stuff its efficiency in the agriculture sector and to boost c o n s u m e r s capital spending. want.’ Indian businesses can now borrow more money overseas to repay domestic loans which were taken out for capital projects. And, encouragingly, there has been a raft of announcements aimed at opening India up to foreign investors. The Bank of India recently announced measures to

40%

It pays to know about currency Investing in foreign exchange offers good prospects – but only if you know the ins and outs of the fast-paced market INDUSTRY VIEW

hen it comes to investing, the foreign exchange (FX) market is difficult to ignore. After a slow summer, FX is in rude health – analysis firm LeapRate put the value of the currency trading market at $179 billion (£111bn) per day for September. The market offers good prospects for those who use it, and, besides weekends, it never stops – it jumps from trading sessions in Tokyo to London and finally New York, meaning it runs on a 24-hour basis. But budding traders must understand that there are risks in what is a fast-paced and highly liquid environment, and work out exactly what drives currencies in order to anticipate market movements.

Trading characteristics Zoe Fiddes, of currency trading firm easyforex, says: ‘Currencies from emerging markets, such as the Singapore dollar, South African rand and Turkish lira, can present many investment opportunities. ‘However, they have different trading characteristics compared with developing nations’ currencies.’ When trading you have the option to either buy a currency and profit from a rise in price or sell and profit from a decline in price. Since it is important to understand the factors that affect pricing and the risks of the currencies you want to trade, easy-forex offer one-to-one training sessions on how to trade in the market. One obvious way to judge a country’s economic standing – and the fate of its currency – is to look at key economic data such as changes in GDP or unemployment statistics. Another important indicator of how a currency will fare on the market is its interest rates, because investors generally prefer to

borrow where money is cheap and use it where rates are high. This means soaring interest rates can lead to a stronger currency – so it is wise to watch for central bank announcements which may hit the market.

Eroding the value Inflation is also important, because if it gets too high it can erode the real value of a currency. But to make things more complex, it can often prompt an interest rate rise from banks looking to tame it, which could ultimately make a currency stronger. Because strong economies export more goods than they import, a trade surplus is likely to attract investors and boost a nation’s currency. Perceptions of risk are also a big influence when it comes to swaying investors. This is a broad topic – risk can include political factors such as government

Investors generally prefer to borrow where money is cheap and use it where rates are high intervention across industries, but also covers setbacks such as natural disasters and corrupt business practice. Investors can often be expected to show more caution around countries with high levels of risk – such as a number of emerging economies – and to move their investments to “safe” currencies when they are particularly worried about the market. It is wise to keep an eye on developments which may change a country’s risk profile – such as a change of government – as well as looking at international risk analysis, which is provided by a number of banks.

Business Reporter · November 2012

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Risk taker or deal breaker?

22%

of companies surveyed for Grant Thornton’s 2011 International Business Report said they felt that the Arab Spring hit their business negatively

an independent report from lyonsdown, distributed with the sunday telegraph

Any investor worth their salt knows that risk is inherent. To manage them you must know the dangers threatening each emerging market By Dave Baxter How steady are your nerves? Any investment carries risk – and emerging markets even more so. The canny investor does not shy away from risk, but manages it. A 2009 Economist Intelligence Unit report surveyed 177 executives around the world, and found that 65 per cent would cancel an investment due to risk but only 49 per cent had a formal process for managing it. Get ahead of the game by knowing the risks inherent in emerging markets. Too hot to handle There is a real possibility emerging economies could overheat and become the victim of their own success. Though growth is slowing in a number of emerging markets – including all of the BRIC countries – it remains strong, and consumer wealth has increased. With large populations and rising GDP per capita, substantial growth is expected for

consumer-facing industries in the emerging markets. But if they grow too fast and suppliers overproduce to meet demand, it will create inefficiencies among providers as well as asset price bubbles which could lead countries into recession. There have also been concerns – raised most recently by the International Monetary Fund’s (IMF) Christine Lagarde – that monetary easing in America has driven down the value of the dollar, sending large flows of capital into emerging economies which only heighten the risk of overheating. Inflation, one of the most reliable indicators of overheating, is worryingly high in places: Nigeria’s central bank has brought it down from a peak of 12.9 per cent in July, but it still stands at 11.3 per cent for September. Argentina’s inflation lingers at around 10 per cent, India’s inflation rate was as high as 7.55 per cent in August, and in Vietnam it hit an eye-watering 23 per cent in August. In some cases governments can tackle this – if interest rates are already low, they can be raised to discourage spending and borrowing,

Business Reporter · November 2012

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A world at risk

as Brazil attempted in 2011 when interest was hiked to 11.75 per cent. Or, as Nigeria has done, inflation can also be calmed by shoring up a national currency and building up foreign exchange reserves. So it makes sense to look for economies where central banks have tight monetary policy and look likely to successfully rein in inflation. Getting political Political risk means any change in a country’s government or regulatory system which could

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result in investor losses, making it a minefield of potential issues. In extreme cases, wars, coups and uprisings can lead to business shutdown and shake investor confidence – as with the Arab Spring, which 22 per cent of companies surveyed for Grant Thornton’s 2011 International Business Report said hit their business negatively. Other problems seem less dramatic

but have more long-term impact. Any change of leader or government – such as Vladimir Putin’s re-election as Russia’s president in May – could change the way an industry is treated. A handover of power could result in an increase in industry subsidies, but it could also mean slashed subsidies, an expropriation of assets, restrictive legislation or other forms of political and regulatory interference. Interventions, such as when Venezuelan president Hugo Chavez decided to repatriate 85 per cent of the country’s foreign gold reserves in 2011, can hit companies hard and cause market uncertainty. Political risk is hard to predict, but a compre he n sive, ongoi ng r i sk assessment can help you to react to threats. David Crofts, managing director for risk consulting in the UK at Aon, says: ‘The key thing is to have a very wellstructured approach to risk management to help identify and quantify risks.’ Another big defence is political risk insurance, which is provided by a number of banks and specialist companies and offers compensation for loss of income due to business interruption – though the meaning of this, and what it covers, can vary with the provider. Business corruption Aside from political interference, there is a risk of business corruption putting a spanner in the works for companies and hurting investors. A survey of around 3,000 global companies by Transparency International in October found an average of 27 per cent thought they had failed to win a contract or gain new work in a country during the past 12 months because a competitor had paid a bribe. This may seem high, but the picture is bleaker for emerging economies: Turkey is the exception with an impressively low 18 per cent, but the figure stands at 48 per cent in Mexico, 47 per cent in Indonesia and 42 per Chavez cent in and Pakistan. Putin T h i s have the compares to er pow to 39 per affect cent for markets

Russia, 36 per cent for India, 34 per cent for both South Africa and Brazil, and 32 per cent for Poland. Corruption can be hindered by individual company action such as regular audits, but more depends on the level of government activity against it, which is monitored by bodies such as the OECD. Natural disasters The developed world is no stranger to natural disasters, but it’s the emerging markets who have the most to lose. While America and Japan have the highest economic exposure to natural hazards so far, it is China, India, the Philippines and Indonesia which pose the biggest risk to investors, according to mapping and risk analysis firm Maplecroft. Maplecroft’s Natural Hazards Risk Atlas 2011 lists them all as high or extreme risk cases, because they are ill equipped to respond to earthquakes, tsunamis, cyclones, floods and drought. The firm rates each country’s economic strength, governance, infrastructures, disasterpreparedness and building regulations as poor – all failings which increase the potential economic disruption. An IMF working paper, Natural Disasters: Mitigating Impact, Managing Risks, which was published in October, agrees with this but also notes that poorer countries tend to be more vulnerable because of their economic reliance on a limited number of sectors such as tourism and agriculture. Other promising economies are at risk, too: Crofts describes Mexico as a ‘challenging’ country for investors, partly because of its susceptibility to catastrophes such as hurricanes. And insurer FM Global’s 2011 Supply Chain Risk Study of 100 financial executives found serious concerns that in the largest emerging economy, China, supply chains would not be able to withstand natural threats because it had failed to embrace the necessary risk management practices. As with political risk, some of the fallout can be absorbed by insurance but in the long term emerging markets need to shore up their economic resilience – the IMF recommends stockpiling ‘disaster financing’ funds which can be used to react quickly to a crisis.

Indonesia’s light still burning bright With an abundance of resources and a strong balance sheet, Indonesia could be the place to cash in on investment opportunities INDUSTRY VIEW

he search for growth is intensifying and investors are looking further afield, beyond their traditional investment markets. In Asia, the focus is shifting, according to Mark Hanney, CEO of Valbury Capital, the London-based broker specialising in Asian markets and clients. ‘China was certainly the story of the decade with 10 straight years of double-digit growth, but Indonesia, Vietnam and Malaysia have also grown rapidly,’ he says. ‘Consumption of natural resources is key as economies

advance. Indonesia has benefited from having a strong balance sheet, low leverage and a healthy urbanisation trend generating increased demand for the country’s rich natural resources. ‘This growth has played a big part in insulating Indonesia from the volatility of the global financial crisis and attracting inward investment capital.’

Tangible risks The government’s ongoing efforts to de-risk their balance sheet is likely to attract further investment, though there are tangible risks from

weakening growth in China and the West reducing Indonesia’s trade-led exports. Action by the People’s Bank of China to stem the decline in China’s demand combined with the announcement of infrastructure stimulus measures should reap rewards for Indonesia.

Attractive opportunity Philip Ball, a trader at Valbury Capital, says: ‘Since hitting lows in late 2008 following the global markets meltdown, the Indonesian equity market has almost trebled. This year it has traded in a narrow range, which we view as a healthy

consolidation pattern that looks set to break out and make fresh highs. ‘Any resurgence in China’s well-being could act as a catalyst. This, coupled with the government’s debt profile, continues to make Indonesia an attractive investment opportunity.’ Valbury Capital is an FSAregulated London broker and member of the London Stock Exchange. It provides a specialist broking service to clients and investors in Asian markets. info@valbury.co.uk www.valburycapital.com

Indonesia continues to be an attractive ity investment opportun

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Emerging markets

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Turkey ups its investment incentives

A programme of lucrative incentives for foreign investors is at the forefront of Turkey’s efforts to reduce its dependency on imports and cut its deficit INDUSTRY VIEW

ttracting foreign direct investment has been a major objective of the Turkish government. To this end, it has improved the investment climate through comprehensive structural reforms and lucrative investment incentives. Over the past decade, it has implemented three incentive programmes – in 2003, 2006 and in 2009 – and announced a fourth one in April 2012. Each programme has been adapted to global economic trends, as well as recent changes in the domestic market. The latest incentives scheme aims to reduce the current account deficit, boost production, and reduce dependency on imported intermediate goods. This entails increasing investment support to Turkey’s less developed regions, improving efficiency in industry and logistics, and investing in mid and high technologies.

Tax reduction Effective as of January 1, 2012, the programme offers investors VAT exemption and corporate tax reduction, as well as social security premium support, interest payment support and land allocation. The programme comprises four different schemes: general, regional, large-scale and strategic investment incentives. These will contribute to the structural transformation of Turkey’s industries, particularly through strategic investments encouraging domestic production of previously imported goods. The government has redefined the regions, decreased the minimum fixed investment amount for large-scale investments and introduced incentives for strategic investments in sectors with a poor balance of trade. Under the new system, the government intends to balance levels of local development, raising investment in the country’s less developed areas. To achieve this, it has categorised the regions according to their levels of development. It conducted thorough research to update information on each province’s socio-economic ranking and grouped them into six categories. These rankings will be constantly updated as different areas reach new levels of development. The incentives system also prioritises specific sectors, such as automotive, aerospace and aviation, railroad and maritime freight/passenger transport, pharmaceuticals, education, tourism and mining. As for the incentives for strategic

investments, the main goal is to support sectors where there is considerable trade deficit, offering strong support regardless of region, and so reduce the current account deficit.

UK investors in Turkey UK companies have been among the top investors in Turkey, as the country offers them tremendous opportunities to penetrate the growing markets of the Middle East, north Africa, central Asia and Caucasus. Today, there are around 2,370 UK companies in Turkey, which have invested billions of pounds over the past decade. The stock value of UK direct investment in Turkey is around $10 billion, up from around $2 billion in 2002. These companies have benefited from Turkey’s robust economic performance. For example, HSBC has successfully ridden the wave of economic growth in Turkey and, as of today, has registered a tenfold increase in its assets there, following the acquisition of a local bank in 2001. Similarly, Vodafone Turkey has been the fastest growing unit within Vodafone Europe, doubling the number of subscribers to 18 million in 2011, up from around 9 million in 2005 when it acquired a local GSM operator. Abundant investment opportunities in Turkey lie in real estate, finance, automotive, ICT, energy, renewable energy, iron, steel and petrochemicals. There are also different avenues of investment in Turkey for UK investors. The expertise of UK companies in public private partnership (PPP) projects is more than welcome. National and local authorities have been implementing numerous investment projects through PPP, and they are also keen to realise further opportunities in education, energy, defence, healthcare, transport and other public services. Opportunities are also available in the privatisation projects. While Turkey has carried out privatisations worth $49 billion Real estate has attracted $25 billion of direct foreign funding in the past decade

$500b n is the value of exports that Turkey is aiming to generate by 2023

in the last nine years, there remain several more areas to be tackled, such as infrastructure and energy generation, which have so far been only partly privatised. The PPP model will be crucial in achieving Turkey’s ambitious targets for 2023, the centenary of the republic’s foundation. It has set specific goals for this year in areas from healthcare and education to economy and defence. It aims to become one of the top 10 economies in the world with a GDP of $2 trillion; to increase its exports to $500 billion; to upgrade its energy, transport and health infrastructure through the construction of hospital cities; to more than double electricity generation; and to build new bridges on the Bosphorus and the Dardanelles straits. Another target is to establish Istanbul as an international financial centre. Having been tested by the global economic crisis, Turkey has emerged with one of the most stable and profitable financial sectors in its region. The government’s Istanbul Finance Centre project offers global companies a chance to run their financial operations in the region through Istanbul, aided by various incentives, a skilled workforce, and a cosmopolitan city with a vibrant local economy. Financial investors from the UK are welcome to contribute to and benefit from this.

Attractive destination Real estate is another popular area for investment, attracting around $25 billion of

direct foreign funding in the past decade. Turkey is the third most attractive real estate investment destination among emerging countries, according to a survey by the Association of Foreign Investors in Real Estate (AFIRE). Istanbul’s rapid rise as a lucrative property investment location has seen it emerge as the top growth market in Europe’s real estate industry, according to a survey by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI). The survey, Emerging Trends Real Estate 2012, is based on the opinions of 600 industry experts, and has placed the metropolis at the top of the Development and Investment categories.

Rising up the table A booming economy and positive outlook, alongside its young population, helped lift the city to the top spot. Istanbul scored the highest in the Existing Property Performance, New Property Acquisitions, and Development Prospects categories. Affected by Europe’s financial crisis, traditionally strong markets such as Paris, London, and Madrid, fell considerably behind, ranking, 6th, 10th, and 21st respectively. Over the past four years, around 2.5 million UK tourists have visited Turkey annually, and now some are starting to settle there. Around 36,000 UK nationals have property in Turkey – the highest figure among the country’s foreign real estate owners. uk@invest.gov.tr www.invest.gov.tr

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the sunday telegraph

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Emerging markets

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Right on the money Bonnie Gardiner’s guide to everything you need to know about investing in emerging markets Emerging market quoted equities

Buying equities (shares of companies that are quoted

This is another equities investment but a little closer

into the emerging markets) is the most direct way for

to home. Many listed companies in the UK and other

investors to get exposure to emerging markets.

What is it?

Developed market route

developed nations are generating a large portion of their earnings from emerging markets, so by investing

Jeff Molitor from Vanguard says: ‘In equities

in shares of that company, you also gain that exposure.

you’re an owner, and as an owner you are

Andrew Pitt of Interactive Investor, recommends local

subject to a variation in terms of what the

companies such as Weir, an engineering firm with

earnings are, the dividend stream and how

heavy exposure to the emerging markets, as well as

people value the earning stream.’

Unilever which has a global presence.

‘Equities tend to deliver the greatest returns for investors,’ says James Ross of Alliance Bernstein.

The good

‘Equities are basically the most direct way of participating in the global economy. But they also have the greatest returns, because if they go well you share in all the upside. So buying direct into the emerging markets plugs you very directly into that.’

Emerging market originated bonds

Bonds are debt-based investments. You make a payment and after a period of time, if all goes well, you get your money back – with interest. Bonds can be issued by specific countries or companies in the emerging markets, and investors can access them via corporate debt (debts denominated in hard currency, usually the US dollar, or alternatively in local currencies).

Aside from the fact it’s simpler to invest locally, firms

The variety of emerging market bonds offers many options

based in the UK also present less exposure to risk.

for investment. Local currencies of the emerging markets can appreciate against the dollar. Pitt describes them as ‘playing

‘You might actually suffer less volatility than

two games’ – currency appreciation, and the attractive yield

investing in a similar company that’s listed in the

that some of these issuers in local currencies offer.

emerging markets in terms of when risk

Bonds are also good for either an immediate investment or a

aversion takes holds,’ says Pitt. ‘It’s those in the

long-term investment, as returns can be taken as income, or

emerging markets that will suffer most.’

invested back into the annual fund.

30 pa r

ts s

ts bo n d s s ck

70 pa r

The bad

Potential for greater returns will always go hand in hand

With certain companies, as with emerging market

with greater risk. If things go badly, you will lose more

equities, you have to be careful with your choices. Pitt

bonds alone, but a diversified portfolio. Debt-based

money. A diversified portfolio is recommended – this is

says: ‘You have to know what the company is doing and

investments are volatile. As Pitt puts it: ‘You wouldn’t want

usually 50 to 70 per cent of stocks , the rest are bonds.

feel comfortable with that in terms of your portfolio.’

Jeff Molitor of Vanguard Asset Management explains:

Whether it is an investment into the

‘In equities you’re an owner, and as an owner you are

emerging or developed markets, equities

subject to a variation in terms of what the earnings are.’

Ross believes the safest option is hard currency bonds, as currency appreciation is often too difficult to forecast.

As a private investor, any emerging markets scenario

Investment into local company shares can be achieved

The best way to invest in emerging markets debt is via an

with either an active or passive fund of your choice.

actively managed open-ended fund.

It is also the most flexible way to invest in the emerging markets. Equities can be accessed via an actively managed open-ended fund or unit trust; an

d un dF de a r T ge Fund an cker ch Ex -cost Tra Low

to put your granny’s nest egg into this.’

is going to be very difficult or completely off-limits, so most experts recommend working through funds.

How to invest

are still a big bet.

Like equity based investments, you should not rely on

active closed-end investment trust, or via cheaper, passive vehicles such as Exchange Traded Funds.

Some companies with heavy emerging markets

‘There’s certainly a place in a diversified portfolio for an

exposure include Ricardo, with its technologies and

investor to have exposure to emerging market debt,’ says Pitt.

automotive branch in China, or architectural firm Benoy which has expanded throughout Asia.

‘There are two which we think are particularly good – one is the Invesco EM Bond Fund, and the other one which we rate is called Investec EM Local Currency debt.’

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Emerging markets

Easing the way for investors Turkey’s investment support agency explains how it can help international investors take advantage of one of the world’s fastest growing economies

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INDUSTRY VIEW Can you tell us about Investment Support and Promotion Agency of Turkey (ISPAT), its mission and services? The agency was established in 2006 to promote Turkey’s investment environment globally. It provides assistance for international investors, linking them with both the government and businesses in Turkey. The agency’s free services include providing market information and analyses, site selection, B2B meetings, coordination with relevant governmental institutions, and facilitating legal procedures and applications, such as establishing business operations, incentive applications, and obtaining licenses and work or residence permits. The agency has carried out global campaigns to raise awareness about investment opportunities in Turkey. It is now focusing on specific countries, sectors and, in some cases, on specific companies, in order to get concrete results. Please tell us about investment trends in Turkey With GDP growing at an average annual rate of 5 per cent for almost a decade, Turkey represents tremendous investment potential. More than 30,000

foreign companies have investments in Turkey. It is ranked as the world’s 13th most attractive destination for FDI (foreign direct investment), and ninth among emerging countries. It has attracted around $110 billion in the nine years up to 2011, compared with $15 billion in the preceding 80 years. Turkey now has the 16th largest economy in the world, and the seventh largest compared to the 27 EU countries. The economy expanded by 9.2 per cent in 2010, and 8.5 per cent in 2011. Its robust economy means Turkey can offer a secure investment environment with lucrative opportunities. Throughout the past decade, Turkey has been improving its investment environment. The 2003 Foreign Direct Investment law made Turkey more attractive to global investors. It guaranteed equal treatment for all investors, without differentiating between local and international investors, and enabled international investors to enter Turkey without a preliminary authorisation request, transfer dividends freely, access real estate, protected against expropriation, and hire expatriates. Turkey also cut corporate taxes from 33 per cent to 20 per cent for all companies. Important parameters, such as the acceptance of the international arbitration courts and the harmonisation of laws with EU legislation, have made Turkey one of the most liberal countries in the world, both in terms of the legal framework for FDI and the investment environment. The sum of all the efforts has led Turkey to achieve a very impressive economic

output over a very short period. How do you see Turkey’s role in the context of global slowdown? Having expanded 9.2 per cent and 8.5 per cent in 2010 and 2011 respectively, Turkey is implementing a soft-landing policy at a time of uncertainties in the global economy. While many economies are faltering, the Turkish economy expanded by 3.2 per cent in the first quarter of 2012. Exports increased by 10 per cent in the first eight months of 2012, while FDI inflows increased by 21 per cent in the first half of 2012. Turkey has diversified its export markets despite economic turbulence. The economic crisis meant that demand for Turkish goods eased off in the European Union, the country’s biggest market, but sales increased in the Middle East and north Africa. Turkey continued to raise its export revenues, which reached a record $135 billion last year, about 17 per cent of its GDP. Despite these developments, the government has been very modest, targeting 4 per cent and 5 per cent for GDP growth in 2012 and 2013 respectively. In the medium-term, Turkey’s economic situation will improve. For example, the OECD expects Turkey to be the fastest growing economy among its members during 2011-2017, with an average annual GDP growth of 6.7 per cent. Mr İlker Aycı is president at the Republic of Turkey Prime Ministry Investment Support and Promotion Agency uk@invest.gov.tr www.invest.gov.tr

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the sunday telegraph

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You can take the man out of the markets... But as Bonnie Gardiner finds out from the businessmen who’ve moved into pastures new, you can’t take the emerging markets out of the man

British-born Richard Coates was a partner at Ernst & Young in London. In 2006 he decided to move to Argentina and invest in farmland.

Steve Clarke, commercial director of Ricardo, spearheaded the company’s entry to the Chinese market, successfully establishing their presence in Shanghai.

Spanish-born José Manuel Ortega worked at Goldman Sachs in the UK. He is now the founder and chairman of O. Fournier Group Wineries.

It was much more a lifestyle decision; it wasn’t about making more money in the emerging markets, I wanted something productive. I had to choose between Colombia and Argentina, but in 2006 Colombia was a bit more dangerous, and Argentina leading into the Kirchner era was going great guns. Five years later I’ve probably had far worse! But that’s the thing about emerging markets, they turn around very quickly. After three years of looking, I bought this farm down here in Patagonia which actually went reasonably smoothly. I’ve been operating it now for a year and a half. As a fundamental type of investor I feel that relatively cheap land by the side of the Andes with a good supply of water will, in the long term, be a good investment. It’s definitely been a positive experience on the whole. I’m not thinking of going back. As a form of risk aversion to some extent, I’ve gone for something basic – food for cows. I’m also just about to embark upon putting a small dairy in to make cheese, for something a little bit more intensive and local market based. My advice is to go slowly. Don’t leap in with both feet, because you’ll think you know the market already, but you don’t. The faster you go, the more each mistake will cost you. You also need to use as much due diligence and research as you possibly can. My friend David English, who is a consultant in Mendoza, was of great help to me in my initial search for property. He actually details a lot of the process in a book he wrote (Expatriate Entrepreneurs in Emerging Markets: Ten Success Stories from Argentina) which is very useful, I think, from a research point of view. You have to have a sensible approach, and learn from other people’s experiences. When you talk about emerging markets you tend to talk positively in terms of where they’re going, but they’re also ‘emerging’ because they recently didn’t exist, so there’s things that we’d take for granted, such as access to information and legal rights. You have to trust the people you’re dealing with or else it’s not going to work.

What piqued our interest in the general automotive market was a desire for technology from the Chinese. As a technology provider it was logical for us to look at that as a market as well as the legislative drivers around fuel consumption improvement and so on. In late 2004 I went out to China to establish our presence; we had worked extensively with China in the past but we saw the need, as a result of continual conversation with customers, to be more local to them. We started off as a sales office in program management, and we now have a technical centre there with fifty people; our presence has gone from strength to strength. My favourite Chinese saying – ‘one step, one step’ – is a good general business strategy. You have to be conscious of cultural differences, take guidance, pay attention to that but at the same time don’t suspend your own compass; your business logic has probably served you well so far. Investing in the emerging markets is a balance of being brave and seeing the art of the possible, but at the same time being aware that in most emerging markets, forecasts tend to be enthusiastic and slightly overstated. The normal good logic applies around ‘buyer beware’ – go through your due diligence, triangulate views and understand where you add value. Talk to your potential customers, as well as local trade associations and the chamber of commerce. Engage with the UKTI (UK Trade and Investment) – that whole cadre of people are very pro-business at the moment so they’ll help you to explore the markets initially. Also speak to people who’ve been on the journey, take on lots of information and then filter the views to suit the needs of your business. On a personal level, enjoy the journey. It can be frustrating, but the way to balance that is to apply a positive mental approach. A sense of humour certainly helps. For the time I spent out there, both myself and my family will always remember it very fondly.

I was inclined to invest in wine since my days in the UK when I worked at Goldman Sachs. I remember seeing a lot of French wines in pubs and restaurants and I didn’t see any Spanish wine, so I decided to invest in the stock market with Spanish bottled wine with the hope of reselling them. By that point I was running a private equity fund for Banco Santander in Madrid. One thing led to another; I invested in the Spanish market, I started talking to a lot of winery owners, and then at some point I decided, this is what I want to do with my life. We started in Argentina, and then we also bought properties in both Spain and Chile. In 2002 when the crisis came to Argentina, we decided to take a bold step and build a state-of-the-art winery while everyone was running away. It paid off because the cost of construction in US dollars was ridiculously low and we jumped on the bandwagon of the exports boom. We’ve now gone from $0 in 2004 to $8million (£4.9m), which is our expected sales this year. If you want to be an emerging markets investor you have to think on the ground and make executive decisions in a split second. The timing and the macroeconomic situation within a country are critical and have greater weight on your returns. Rules can change from night to day, and if you don’t understand the rules then you can really get burned. The most heartbreaking experiences are the labourrelated injustice you suffer in Chile and Argentina; that’s been something that’s been very difficult to swallow. If I had any advice to give, it is flexibility. You cannot come with a pre-arranged concept because it’s just not going to work. I can’t really complain though – we started something from scratch, and we’ve become something of a power-house in the high quality wine sector – not only in the countries we work in, but also in the world.

I’ve invested in cow food – it’s risk averse. I’m also adding a dairy to make cheese

Don’t suspend your own compass; your business logic has served you well so far

We’ve gone from $0 in 2004 to an expected $8million in sales this year

Business Reporter · November 2012

an independent report from lyonsdown, distributed with the sunday telegraph

Emerging markets

Find us online: business-reporter.co.uk

What does the future hold?

Emerging market bonds may be a more attractive option than equities in the current economic climate INDUSTRY VIEW

espite recent market volatility, the kind of wholesale liquidation of emerging market exposure that happened in previous crises seems like a thing of the past, with emerging markets as an asset class graduating up the global capital structure of risk. While past performance is no definitive guide to future performance, sharp bouts of volatility stemming from US-, Europe- and China-related growth fears have helped to extend emerging market equities’ record of poor risk-adjusted returns relative to emerging market debt, where balance-sheet strength and policy flexibility in emerging markets will likely be more supportive of debt valuations than equities.

Flight to quality During recent periods of market duress, we’ve seen a flight to quality within emerging markets, with investments moving out of equities and currencies into areas such as

high-grade USD-denominated emerging market sovereign and corporate credit. This supports the argument that investors recognise that the stronger fundamental position of emerging markets no longer justifies a wholesale liquidation of exposure during crises, nor an outsized spread premium relative to the developed world. If anything, this upside-down story – one of worsening developed markets, fiscal balances and public debt-to-GDP levels versus emerging markets, combined with a strong, longer-term flow into the emerging market asset class – should help forestall the kind of capital flight and severe spread volatility we observed in emerging markets more than a decade ago. With the fourth quarter under way, investors should expect more volatility, with leadership change in China, elections in the US and ongoing issues in the eurozone dominating headlines. Despite this, there are still a number of supportive and technical forces for emerging markets that are not

markets since 2008 has attracted a diverse mix of new investment. Western Asset subsidiary Legg Mason continues to see a broadening and deepening of the investor base.

Safety areas

expected to subside. While risks still exist within the emerging market space, resilience of emerging market growth, which has surprised many observers given that global forecasts continue to be revised lower, is a good example of why investors remain interested in the region. Balance-sheet strength and policy flexibility matter more for

emerging markets in this global macro-environment than does their ability to sustain the high growth rates to which investors have been accustomed. Equity markets remain more volatile than bonds, with the former vulnerable to technicaldriven rallies and downward revisions to global growth. From a technical perspective, outperformance among emerging

Weighing these factors, it currently makes sense to focus on USDdenominated emerging market sovereign and corporate debt for their more defensive qualities, with local markets only played tactically. Investing in local-denominated emerging markets remains an attractive fundamental story over the long term. Shorter term, however, given the high and positive correlation of emerging market currencies to global markets, and the possibility of another round of macro-prudential measures, the risk/reward balance favours USD-denominated emerging market debt. Robert Abad is portfolio manager at Legg Mason, a subsidiary of Western Asset www.leggmason.co.uk

Planning for tomorrow. Delivering value today. Randgold Resources’ far-sighted strategy of growing through discovery and development enables it to deliver value consistently to its stakeholders while building platforms for further expansion. The company continues to increase gold production off a growing resource base and to ramp up its existing operations. At Kibali in the Democratic Republic of Congo, it is developing what will be one of Africa’s largest gold mines. Meanwhile, its exploration teams press on with the hunt for more multi-million ounce gold deposits, feeding a constant stream of potentially profitable opportunities into the company’s pipeline and enlarging its footprints in Africa’s most prospective gold regions.

www.randgoldresources.com

dPA 5657/1

LSE: RRS • NASDAQ: GOLD

Business Reporter · November 2012

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Emerging markets

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‘Investors should keep the faith’

Anyone tracking emerging equity markets in the last two years could reasonably question the relevance of the emerging market (EM) growth story for investors. Despite superior economic performance across most of the BRIC and other major EMs in 2011 and 2012, EM equities have underperformed in both the It’s been a rough ten years for S&P 500 and the MSCI global Throw in the impact of equity emerging markets, but it indices. stagnant growth in the west on looks like the tides are turning demand for EM exports – and fears of continued withdrawal of European bank credit – and the question marks get bigger still. But investors should keep the faith. The cyclical factors that have driven recent underperformance look to be improving and better medium-term growth prospects will translate into returns over the longer term. Meanwhile, other EM asset classes have continued to deliver spectacular returns – emerging market bonds Brian Coulto n is the emerging have delivered total returns markets strategist at Legal and of nearly 17 per cent so far General Inve stment Managemen this year. t. He was previously an The backdrop for recent economic adviser for th e UK sluggishness in EM equities Treasury wa s a p e r io d of ove rexuberance in 2006 and 2007 that saw China’s stock market increase fivefold and the relative EM to developed market priceearning valuations hit record highs. This left EM equities vulnerable to

China’s stock market increased fivefold in 2006-2007

shocks. Even though they were first to rebound in 2009, EM equities were held back by inflation concerns in 2011 and by growth worries this year. But the economic policy cycles which created this volatility now look to be maturing, while the EM valuation premium has shifted to a discount. Hindsight brings great benefits. It’s now clear that EM policy-makers overdid the easing in 2009. This resulted in inflation pressures through late 2010 and 2011, forcing the authorities to apply the brakes. Brazil raised interest rates by 3.75 per cent between April 2010 and July 2011 while China hiked banks reserve requirements by 5 per cent. The only problem with these policy adjustments was that they did not anticipate the sharp slowdown in European import demand from the middle of 2011.

The upshot was a combination of both declining domestic demand and weak exports over the last year, a mix which led many to question whether EM growth could really continue to decouple. However, the policy levers were moved again in late 2011, albeit on a less dramatic scale than in 2009, and in the last month we have finally started to see the benefits on domestic growth. Infrastructure investment is rising robustly again in China and retail sales, investment and industrial production are looking stronger in Brazil. As the cyclical outlook improves, emerging equities should start to reflect better medium term growth prospects. Urbanisation, high i nv e s t me nt r ate s i n A s i a , demographic trends (outside China) and productivity improvements should continue to drive stronger Emerging markets in 10 years 2012 Growth shows future is looking brighter Mid 2011 2011 Sharp cut in China rises bank European import reserves by 5% demand 2010 April 2010 Inflation Brazil raise interest rates by 3.75% pressures 2006-07 Period of over exuberance

17%

Returns delivered by emerging market bonds so far this year

supply-side growth than in the advanced economies. Moreover, the blight of bank deleveraging and fiscal austerity that will continue to weigh on demand in the advanced economies for years to come looks far less of a problem in EMs. History suggests that stronger nominal GDP growth is reflected in corporate earnings growth in the long run. Tight labour markets and robust wage growth have seen profit margins squeezed in EM over the last year, but considering that strong household income growth is supporting consumer s p e nd i ng a nd he lpi ng t he rebalancing of economies toward domestic growth, this should help support the top line. Investing in EM is clearly not without its risks. EM equity returns over the past ten years have been highly volatile compared to other asset classes and the sharp sell-off in EM exchange rates last summer hit holders of EM equities and local-currency denominated bonds hard. But the economics is hard to ignore.

Make a difference while making a return Invest in the natural beauty of Costa Rica and benefit from an unparalleled level of customer care and a solid delivery of returns INDUSTRY VIEW

ach year, approximately 1.5 million nature-hungry tourists visit Costa Rica to soak in the country’s abundance of natural beauty. Boasting 5 per cent of the world’s biodiversity, yet covering only 0.03 per cent of the planet’s surface, it’s understandable why. The country has many national parks, focused on preserving wild forests that the country knows from experience can be so easily lost. After the Second World War, Costa Rica lost 80 per cent of its forests to commercial logging and to make way for commercial cattle grazing. This devastating movement has now been superseded by a new ethos for preservation.

Postive for all Many blue-chip companies have planted their roots in this Costa Rica. Intel, who has invested approximately $1 billion (£626m) in a vast manufacturing facility, is a prime example. The alliance of ecological-based thinking and commercialism certainly seems to be resonating positively for all parties.

while allowing them to make a difference. This is also true for Ethical Forestry, a This combination certainly seems to UK-based forestry investment provider which be attractive, as there has been a sharp owns and operates sustainable tree farms in increase in investors wanting to benefit Costa Rica on behalf of UK investors. from the investments on offer. And who Within the Alajuela district, it has a Intel have can blame them? 25-acre head office site, which invested houses its timber mill and nurseries that produce and plant 25,000 new Proven track record trees per week on behalf A typical investment of £21,000 in Costa Rica of investors. Also within this site is a projects returns of around £100,000. research and development centre Plus it has a proven track record for which works closely with Costa Rica’s leading paying investors their projected returns and a universities to develop forward-thinking reputation for having an unparalleled forestry programs. Surrounding this site is a approach to customer care. How many other alternative investments can boast that their investments actually work? ‘Offering total transparency to investors Ethical Forestry’s plantations is very important to us. We have an open-door are run on a ‘for profit’ policy and actively invite prospective basis, clearly focused on investors and current investors to drop in and discuss their investments whenever they healthy returns for investors wish. This invite applies to the UK and Costa whilst offering a high level Rica. We regularly have investors, IFA’s and of investor security agents visiting our UK offices in Bournemouth to learn more about our investments, our Forestry Easement Trust large and ever-expanding portfolio and to meet the team. We also have many of sustainable tree farms, which are visitors to our head office in Costa Rica where individually managed by resident caretakers they can tour our operations,’ says Marcus along with teams of government-approved Jones of Ethical Forestry. forestry engineers. Ethical Forestry has now gained significant As its name suggests, Ethical Forestry was momentum due to the sheer size of the UK formed with a solid set of principles that and Costa Rica operations. It aims to continue combines ethics with forestry. Its entire to grow by utilising their knowledge to create operation focuses on sustainability and the best forestry investments possible; providing customers with positive returns

$1bn

Harvested Melina trees await processing at Ethical Forestry’s timber mill continue with their ethos of reinvesting into purchasing every plantation they own outright; employing the best people; offering them the best working conditions and last, but by no means least, continue to buy and preserve wild forests and protect them within its forestry easement trust. 0800 075 30 10 www.ethicalforestry.com