Are Emerging Markets A Waste Of Time?
With downward growth in China dominating the news, one of the common questions business is asking is whether investing Australian capital into emerging markets is still financially worthwhile.
Chinese growth has stagnated at around the 7% mark and turmoil on the Chinese share-market has scared off many potential investors. Brazil has entered recession and political corruption has done its international image few favours. The Russians are embroiled in regional conflict with the Ukraine and Western sanctions have hampered its oil-driven economy. Emerging market cynics appear to be on point that the gloss of the so-called BRIC markets are wearing off.
Political and economic volatility are often the hallmarks of emerging markets and so these markets pose greater risk to investors than developed markets do. But unlike developed markets, emerging markets offer untapped potential and market-gaps that Australian companies are perfectly positioned to take advantage of, especially given the intellectual capital they possess.
Even though the BRICs are currently underperforming compared to recent trends, other emerging markets still hold a lot of promise. For example, investors are enthusiastic about the MINT quartet; Mexico, Indonesia, Nigeria and Turkey. Combined, they represent a market of more than 620 million consumers and with the exception of Nigeria, they are all G20 economies. Their long-term growth projections also forecast sustained growth. Turkey, for instance has grown at an average rate of 4.7% year on year for the last decade. With a steadily growing population and investment-friendly business climate, it is an inviting destination for foreign direct investment.
A closer look at Australia’s most populous neighbour, Indonesia also offers an optimistic view for Australian businesses looking to expand globally. Indonesian economic growth is projected to reach 5.5% in 2017, up from 4.7% in 2015. President Widodo also took the difficult decision to abolish fuel subsidies in January 2015, one of the bravest signs of structural economic reform by his government. The country’s infrastructure program is also finally gaining traction, with spending on roads, ports, water facilities and power plants ratcheting upwards in 2015 compared to low levels of spending in previous years. With a progressively growing middle-class and thriving democracy, Indonesia remains a stable emerging market for Australian companies to seriously consider.
The outlook in another massive emerging market, India, is also positive. India has outpaced most of its neighbours in Asia and its economy is forecast to grow by up to 7.5% in 2017, signalling enviable positive growth trends into the future. Urban centres such as Bangalore have also established reputations as startup ecosystems, with more than 1700 startups now calling Bangalore home. In addition to its well established tech industry, India also offers the advantage of high English fluency and lays claim to being the world’s biggest democracy.
Middle East and North Africa (MENA)
Despite the collapsing price of oil, the Middle East and North Africa (MENA) region will also continue to experience growth of more than 3% throughout this decade, with almost every country in the region forecast to grow economically. This is in part due to a focused campaign to diversify the economies in the region and to reduce reliance on oil prices as the key driver of economic prosperity. Take the UAE for example where hydrocarbon revenues now account for only 25% of GDP, with the growing logistics and aviation industry likely to drive 3.8% of growth in 2016. Jordan is another MENA market which has shown strong economic promise. Unlike its oil-rich neighbours, Jordan has few oil or natural gas reserves. However this may be a blessing in disguise, as its capital Amman has transformed itself into a promising start-up ecosystem and one of the region’s leaders in the IT sector.
What are the risks of Emerging Markets?
With long-term forecasts for many emerging markets looking positive, there are compelling reasons to invest in them. However, one common concern is that emerging markets are a high risk proposition because legal protections are minimal. While it is true that some countries are harder to do business in than others, many emerging markets have taken steps in the past to make their business climate more friendly to international investors.
Take for instance the important area of intellectual property. The Gulf Cooperation Council (GCC) protects intellectual property through the GCC Patent Office, which commenced operations in 1998. It is a unifying regime which safeguards patents, trademarks and copyright for companies which register with the body in any of the six member countries.
International Multinational Treaties (IMT’s) have also started to grow more teeth on the issue of intellectual property rights. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) applies to every member of the WTO and came into effect on January 1, 1995. It establishes a regime whereby defined term limits are given on patents, trademarks and copyright globally. It also allows intellectual property disputes to be heard in arbitration and failure to adhere to WTO decisions entail harsh penalties for contravening countries.
Another common concern which companies will flag is the risk of expropriation of their assets and real property, i.e. the state taking a company’s assets in a project. The most popular recent example of this is the Argentine state’s expropriation of REPSOL’s oil production operations in 2012. However, for Australian companies this risk has become less pronounced, as the Australian Government has entered a number of bilateral investment treaties (BITs) for the protection of Australian investments overseas, including with key trading partners such as China, Indonesia, Vietnam and India.
Despite setbacks for some of the more prominent emerging economies, many emerging markets remain an attractive prospect for savvy investors looking beyond traditional markets. With the legal risk of emerging markets becoming progressively less worrisome, international market entry remains a promising way for companies to diversify their revenue streams and build their international profiles. In short, emerging markets continue to offer emerging opportunities.