By Joel Kranc
Several schools of thought are opining on the current market environment and how that might effect emerging markets. A Natixis Investment Managers 2023 Institutional Outlook says that 65% of institutional investors believe inflation will hinder emerging market investment. This is mainly because 64% believe emerging markets will be at the mercy of U.S. monetary policy, and emerging markets rely on foreign capital and investment, which is a bit harder to come by these days.
Rising rates may also make it harder for emerging market companies to handle dollar-denominated debt.
However, at the CAIP Fixed Forum in Toronto this past month, a number of emerging market experts made the case for specific regions and where institutional investors might find opportunities.
Antonio Loureiro, principal, total fund management, Ontario Teachers’ Pension Plan, said that in areas like Latin America, for example, there was a time when fiscal responsibility, fighting inflation and floating the exchange rate was the right “playbook” for economies wishing to attract investors.
“That was the playbook, and it was nice and tidy,” Loureiro said. “It’s what we called the Washington Consensus – something the International Monetary Fund would advocate as reform for emerging markets.” He explained that following a certain checklist of free trade and regulation was the consensus on which people hitched their economic hopes.
But challenges have emerged, he noted. “The Washington Consensus is dead. Not even Washington believes in the Washington Consensus. [In] countries like Chile and Mexico, no one votes for the Washington Consensus. It worked for a while and things work until they don’t. You need to try something different so the playbook is changing.
“It’s changing and it’s a tricky time for investors for emerging and developing markets,” he added. The message, he stressed, is that the old playbook isn’t working, things are changing, transitions are messy, and because it’s more challenging, investors we have to analyze carefully where they are investing.
More and more, he stated, geography matters and the way in which regions like Latin America or China will change will have to be carefully watched.
China Isn’t the Only Asian Market
Speaking of Asia, Jeff Nankivell, president and CEO of Asia Pacific Foundation of Canada, noted that the growth of the middle class is a reason for investors to look seriously at the region. However, it’s not local to China. There is broad-based economic growth and social development growth, even where there were low levels of economic growth — countries like Bangladesh.
“The bottom line is that over the next few years there will be another 1.5 billion people who will be joining the global middle class in Asia,” he said.
He further added that this means people will demand new products and services have money to spend on education and lifestyle, and so growth opportunities are enormous. “The big story is growth of the middle class and urbanization is big part of that.”
This will require investment and will bring returns. Nankivell pointed out that the share of annual global growth from Asia is 70% in recent years, and that portion will go higher in the next few years, to 75%. There will also be growth led by countries such as India, Vietnam and the Philippines. “That size and level of growth lends itself to exciting opportunities,” he noted.
Interestingly, the geopolitical factors in the region — the China-U.S. tensions — are a big issue. However, businesses and governments see that dynamic differently. “They don’t see China versus U.S., but most of Southeast Asia, and there is little interest in the question of choosing sides. …Their concern is not about trade war or geopolitical tension, its change in governance as operators in China. It’s a lot less about the U.S. and China than you might think.”
Growth in southeast Asia is coming from demand from China. Institutional investors can capture that upside of the growth through investments in China plays in other jurisdictions, Southeast Asia. There is a conversation in European corporate boards about investing in China. But this is not the case in Southeast Asia corporate boardrooms. There are different roads into that and Europe-China relations will worsen before they get better. It’s also dependent on China-Russia and how NATO reacts.
Out of Africa
Another emerging economic zone to consider is Africa. Why Africa? Olutoyin Oyelade, president of CASA Foundation for International Development, pointed out that the World Bank reported in 2022 foreign direct investment to Africa was $83.2 billion with an ROI of 11.4%.
By way of comparison, China had foreign investment of $183 billion and an ROI of 9%. The average globally was 7%.
This, she said, tells a positive story for African investment. “Africa is not well known, and people understand Africa as a deficit [economy] — housing and infrastructure. But looking at investment, the story is you can put money in Africa and rest if risks are well mitigated. You can sleep if you understand the markets you’re invested in.”
Investors have to cautiously choose where they invest. East Africa, Rwanda Tanzania are collectively often referred to as Silicon Savannah. The tech areas is these countries are providing returns in double digits, she added.
“The risks are huge but are not unmitigatble and we can put mitigates in place. I know for sure that half of the time people were looking for our risk but foreign exchange was stable at that time.”
A lot of the challenge is that people don’t know how to get money out. However most Western banks have branches in Africa. A lot of African countries have reformist agendas — tax rebates but also side agreements to make investors welcome.
Overall, the current market with geopolitical turmoil, war in Eastern Europe (and China’s tacit support to Russia), along with inflation and a post-COVID hangover, is creating challenges for large investors looking at emerging markets. It’s time to consider a new playbook and look at opportunities region by region.
