South Africa: Emerging Markets Looking Up in Long Term

Business Day ( Johannesburg)

August 7, 2006
Posted to the web August 7, 2006

Judy Green
Johannesburg

INVESTING in emerging markets by funds in developed countries has been cyclical, with times of being in favour followed by periods when there is no interest.

Fund managers in more sophisticated markets have bad memories of emerging market crashes -- the 1994 Mexican peso crash and the crises of Russia and Asia in the late 1990s.

Robert Clark, dean of the School of Business Administration at the University of Evansville in the US, says emerging markets are now in a different place and interest in them will be more sustained and long term in nature.

Most of them have moved from being debt traps to having acceptable levels of gearing.

Emerging Market Bond Index spreads have gone from the 600 range to under 200. Governments and regulators now have the political will to keep order.

For this year up to August 2, the world's best emerging market performer was Zimbabwe, with a stock market return of 116% in US dollar terms.

But Clark, who is on his first visit to SA, warns that it is not just the numbers that will grab the attention of the rest of the world.

Addressing members of the Investment Analysts Society of Southern Africa, he emphasised how important it was that younger markets were well regulated and critically transparent -- fair, open, and available to foreign investment.

The legal and regulatory frameworks must be intact and this includes specifics such as the prohibition of insider trading.

Market trading forums should be liquid -- nothing scares away an international fund manager like delays in moving in and out of stocks. Clark cited an example of putting together a Nigerian portfolio that took more than a month to assemble.

He says that many emerging markets now have insider trading legislation on their statute books, but case law and prosecutions are still lagging. There are many risks to be eliminated before outside investors are convinced.

Clark says traded entities in emerging markets need to use the common reporting language of International Accounting Standards to ensure quality of information. International investors are looking at infant markets as regions with specific sectors such as banking and pharmaceutical, rather than purely on a country-by-country basis.

Although our local market performance over the past few years has been good, SA has not featured in the top rankings of emerging markets.

In 2004, Ukraine was top spot with a 170% return in US dollar terms, followed by the Slovak Republic, Columbia and then Jamaica, Egypt, Bangladesh and Romania, all with more than 100%.

Last year saw Egypt first with 161% return on the markets, with investors in Jordan, Saudi Arabia, Columbia and Lebanon receiving returns in excess of 100%.

As markets become more integrated, the benefits and attractions of investing in emerging markets come down as these areas get more closely correlated with developed market returns.

From 1992-97, SA had a correlation coefficient of 0,13. In the five years after this, the correlation increased to 0,45 as SA became more in sync with global developments. The whole process of investing in emerging markets these days is significantly different to 10 years ago.

Young African markets first came to the world's attention in 1994 when Kenya led the rankings with the highest return of all stock markets, both emerging and developed.

A year later, Cote d'Ivoire was first. But many of these leaders with high returns are still not attracting funds and the potential remains untapped until regulatory frameworks and governance issues are improved.

Clark warns that investing in emerging markets is a dynamic process requiring a lot of attention. Portfolio managers need to consider their clients' objectives and policies -- do they want to hedge against any currency risk or take the whole package the region has to offer?