Part Three adds a more practical perspective to the issues identified in the general discussion in Part One of country classifications by analytical service providers and Part Two, which is essentially an advocacy for developing market investing. This part describes on the ground considerations on what constitutes an investable market based on experience and perspectives outside stock market rules.
We start with a comprehensive overview of the true nature of business in China based on decades of experience in that country. Given the size and relative importance of China today and even more so in the future, this review provides investors in both public and private markets a solid foundation on how to approach and evaluate a China investment. It is hard to argue that China can be seen as one country or one economy, yet the overriding culture and business philosophy remains the same throughout China. Dealing effectively with the real China, or the elephant as the metaphor goes, will become increasingly important.
We review markets that are at differing stages of development. One of the more advanced economies of Latin America, Colombia, figures in the league of either the Next 11 or the CIVETS. Infamous for its drug business and crime rate, the country is underestimated from a reform and economic point of view. A review of the economy and some aspects of its markets shows why Colombia is considered one of the front-runners of Latin American opportunities.
Further down the traditional path, we look at one frontier country economy that has abundant resources and progresses despite the moderate level of overall economic development. The Republic of Mongolia does not typically figure on the radar screen of most investors, but the underlying economic potential warrants a closer look. Despite the limited liquidity of the stock market, Mongolia was leading the performance tables for a good part of 2010 and 2011 and is poised to see a broader set of companies coming to the market.
The Republic of Mongolia has been coming onto the radar of investors because of its resource endowment. Multiple large global players are vying for mining and extraction concessions and several companies have sought a listing. Looking at the economy in depth suggests that there may be a real frontier market in the making, albeit some years away.
Haiti, a country struck by tragedy but with committed financial aid exceeding its GDP, could emerge from the ashes in the longer term.
In Asia, we consider three economies that do not make the classification as frontier economy. These economies have tiny and largely illiquid stock markets, two of them less than one year old and with only five listings combined.
Myanmar has been a hot topic since last year when political reforms started. The growing confidence of the international community in a more conducive political system in Myanmar has rekindled interest in the existing but insignificant stock market. The Tokyo Stock Exchange and Daiwa Securities are committed to building and managing a modern infrastructure and there seems no shortage of interesting resource companies and investment opportunities in what is probably the last real frontier economy in Asia of size.
Lao PDR has a stock market with two securities, but globally was among the best-performing market in parts of 2011. The model, namely to establish a joint venture with an experienced market operator, the Korean Exchange, and launch with a leading security, a state-owned utility, and a bank, argues for some consideration despite failing many requirements of current market classifications.
Again in joint venture with the Korean Stock Exchange, the Kingdom of Cambodia sports a number of interesting listing candidates. The first IPO has been heavily oversubscribed and made headlines in terms of immediate performance.
These are markets to watch in the coming few years or for the pioneer investors to participate in, with a very long investment horizon.
Credit markets are the fuel of any economy and the foundation of investment. Developing economies depend on credit markets that function well and Central and Eastern Europe are no exception. A profound analysis of regional credit markets under the umbrella of EU institutions shows the consequences of unfettered expansion in fast-growing economies and economies in transition.
Eastern Europe is an example where rapid direct and market investment has caused a problem for local banks mostly invested by European banks and European investors. Investment flows through or led by commercial banks tend to increase prices and create an asset buzz but they do not provide the equity required for businesses to prosper. Recovery will be hard and long and economies will suffer, most notably the companies and individuals therein.
Many investors have sought to access markets through private, commercial, or industrial property and a review of the various legal conditions across a large number of already popular and emerging economies in Southeast Asia serves as a good reminder that property investments are not always the best way to participate in the growth of an economy. Most economies require advanced legal structures to acquire property and the risks are evident. Many private investors are well served to carefully consider their structures and adjust to the realities when governments will seek to normalize property holdings of foreigners.
On the subject of critical business issues, we emphasize a much overlooked subject, namely responsibility with respect to good governance and avoidance of corruption. Most investors and executives tend to see businesses in their local and regional environment and adjust to requirements on the ground. The international community, however, is increasingly rallying support for a global system of combating inappropriate behavior no matter where it occurs. The review of the UK Bribery Act, while unusual in a book on developing markets, highlights the very essence of international efforts. UK- or US-related companies can no longer rely on the relaxed attitude of local administrations, because they may now face accountability at home. This is a hard call to make in bandit economies that require some flexibility.
The reasoned review of the application of the UK Bribery Act to investments outside the United Kingdom and a comparison to the US legislation provides an excellent backdrop to what should and should not be considered acceptable behavior. Institutional and private investors will need to devote more resources to this issue or risk facing some unpleasant questions or consequences.
One of the critical ingredients in considering, making, or having an investment in developing economies is access to corporate information first and some degree of the reliability of such information second. We often forget that the aggregate information we receive is nothing but the accumulation of lower-level information.
The contribution on information aggregation is a most important subject when assessing company information, research and other external information. Looking at the sources of mistakes and flawed information flows, we must appreciate that not all we receive actually reflects realities. This is the daily challenge of any developing market investor.
From an operating viewpoint, harnessing marketing in less structured economic environments is a critical success factor. Companies need to get their products and services into the market and in many cases we observe very different patterns of marketing success in developing economies. Taking a practical yet relevant look at some of the successes and failures provides a backdrop to some of the pitfalls in bringing foreign products to market or launching domestic products in new markets.
On the subject of practical experience and on the lighter side of developing markets investing, the views of a pioneer investor and respected advisor describe the realities of investing and behavior in developing and bandit economies.