Progression Of Emerging Market Economies

China as an Emerging Market

How To Economy Of A Country Progressed Towards?

Emerging market economy refers to the economy of a country that has progressed towards being advanced as indicted by its local debt and equity liquidity markets and presence of a market exchange and regulatory body (Fabozzi, 2013). An emerging market is not as advanced as that found in a developed country but as compared to the frontier market economy, the emerging market maintains its economy and infrastructure more efficiently as compared to the frontier market economy (Brealey & Meyers, 2010). Generally, emerging markets are not on the same level of market efficiency and strict regulation of accounting standards and securities as the advanced markets are. These economies, however, have a real infrastructure in terms of finance that comprises of a banking system, stock exchange, and a unified currency.

Emerging markets are sought after by investors because of the potential high returns stemming from the quick economic growth as determined by GDP (Bilgin, Sriram, & Wuhrer, 2004). Investment into these markets is usually accompanied by huge risks such as political instability, local infrastructure challenges, currency volatility, and few opportunities for equity. All this is because the major companies in the markets are either managed by the state or are private. Another reason why it is risky to invest in the markets is that the local stock exchanges do not provide liquid markets especially for foreign investors (Kim, 2015).

Some common emerging markets include Brazil, China, Russia, India, Malaysia, Chile, South Africa, Thailand, Turkey, Indonesia, and Hungary (Jayasuriya, 2011). Others include Holland, Mexico, Colombia, Peru, and Philippines (Jayasuriya, 2011). This paper will consider four emerging markets namely China, South Korea, Malaysia, and India in its analysis of emerging markets. The paper will also analyse the performance of each investment, their historical performance and compare these to those conditions found in developed markets. The risks associated with each investment will also be considered in the analysis.

Many reports have been given and analysed on the news in the past 5 years and have all indicated that China is not doing well. China’s economy has grown considerably faster as compared to the economies of other countries despite undergoing a slowdown. In terms of nominal GDP, China has the second largest economy behind the United States and it ranks first if the economy is analysed in terms of PPP (purchasing power parity) (Luo, Xue, & Han, 2010). The Shanghai Composite Index, which represents the country’s stock markets reported solid annual returns of 79.98% in 2009 but fell considerably in 2010 to 14.315%. However, in 2014 delivered returns of 52.87% (Luo, Xue, & Han, 2010).

Opportunities for Investors

One investment opportunity in China is the private equity industry. The country’s economy has grown considerably in the last decade to the extent that private equity in China has become an industry on its own. For the 12 years between 2001 and 2012, there were over 10,000 deals worth billions of dollars (Luo, Xue, & Han, 2010). The companies that dominated the market were mostly dollar-denominated global firms but as the industry has grown over the years, more Yuan-denominated funds both local and foreign have entered the market and have tied up many deals at an impressive pace. Private equity companies looking to invest in the Chinese economy should expect competition for the available deals. The market has also been mired by fraudulent accounting scandals that have affected most deals to the extent that a significant number of them remain un-exited (Jayasuriya, 2011).

The deep-seated structural trends in China such as urbanization, the expansion of consumer consumption, and innovations in the infrastructure used in manufacturing provide opportunities for growth in support industries such as the packaging and machine components (Kim, 2015). The reason for investment in support industries is that most major investment opportunities such as rail, branded food and beverages, and housing are heavy capital intensive, have high valuation, and are managed by government. However, the support industries to these sectors are on high demand and serve as lucrative investment opportunities.

China’s strengths are that it is a big internal market that boasts of about 1.3 billion customers and it is a fast growing market as already mentioned. The growth rate stands at atleast 7% each year (Jayasuriya, 2011). The labor costs in China also remain comparatively low. The development of the provinces in the western part of the country and the construction of rail especially in Sichuan province signal new opportunities in the land. China’s weaknesses include an ever-changing legal setting that does not inspire foreign investment, complexities emerging from bureaucracy and the administration (Murphy, 2013). Other weak points include absence of transparency, corruption, and fragile protection of intellectual property. The cultural differences that occur when conducting business with foreign investors is also a major stumbling block to investment because it implies that for the foreigner’s investment to take effect, they will need to learn and apply the culture in business activities within the country. China also has an inadequately developed middle management stage and a high turnover rate for staff (Luo, Xue, & Han, 2010).

Malaysia as an Emerging Market

The Chinese government on the other hand, has welcomed foreign investment in several industries and economic sectors. These include advanced technology, equipment production, service industry, clean production, recycling, and the use of renewable energies. However, the government has restricted access to sectors that have an agile production capacity and use advanced technologies or those sectors that are heavily linked to social stability (Schnabl, 2012). There are bilateral agreements in place that protect foreign investment among other agreements that seek to make the country a suitable destination for foreign investors. International investors can be access equities listed in Shanghai through trading stock with Hong Kong. As much as China is a lucrative investment opportunity, the market is volatile and there are concerns about its corporate governance, which serve to discourage individuals from investing (Yalama & Celik, 2013). However, being an emerging market implies that the country is welcoming foreign capital gradually and this alone is reason enough to encourage investment.

Developing cities such as Foshan present an opportunity for investment from foreigners. This city’s economy is focused on manufacturing, especially of machinery and equipment. One area that foreign investors can consider is the consumer electronics industry that deals with manufacture of air conditioning units and refrigerators. The Made in China 2025 program also presents another investment opportunity for investors in the city and other parts of the country.  The Foshan High-Tech Industrial Development Zone (FHIDZ) is close to China’s major cities of Guangzhou, Shenzhen, Hong Kong, and Macau. This proximity has seen the city develop into a crucial spot for China’s tech industry with an industrial chain for manufacturing of equipment, integrating R&D, engineering design, precision machining, integration of systems, promotion of brands, and high-end exhibitions. Industries here include auto parts, home appliances, textile businesses , pharmaceuticals, electronics, new materials, optoelectronics, and food and beverage, ceramics. All these present opportunities for investment.

The World Bank asserts that Malaysia is a very open middle-income economy. In 2008 it was identified by the Commission on Growth and Development as one of the 13 countries that had recorded an average growth of not less than 7% for more than 25 years (Jayasuriya, 2011). Malaysia is a leading exporter of electrical appliances, parts and components of electrical devices, natural gas, and palm oil. The financial crisis that affected Asian markets as well as the global financial crisis in 2008 and 2009 both significantly affected the Malaysian economy but the country recovered quickly (Jayasuriya, 2011). Ever since, the country’s GDP has been at 5.7% on average since 2010.

India and South Korea as Emerging Markets

The FTSE Bursa Malaysia KLCI, which is the leading index in Malaysia reported that in 2010, the economy recorded gains totaling 19.34% which were followed by flat return rates of 0.78% in 2011. The years of 2012 and 2013 saw the country bounce back to figures of 10.34% and 10.54% respectively before a dip of 5.66% and a further 3.11% in 2014 and 2015 respectively.

Malaysia has four major sectors that present investment opportunities for foreigners. These include the service industry, manufacturing, mining, and construction sectors. The high potential areas of investment include biotechnologies, transport, electronics and electricity, telecommunications, high-tech industries built for export, and service operations.

South Korea boasts of a robust macro-economic position. The current framework that the country uses to execute its macro-economic policies helps the country to achieve relatively stable growth at a minimal inflation rate. The economy has been growing steadily since the recent global recession that hit several markets (Global Trade, 2012). However, the overall sluggish growth of the global economy as a result of the recession and financial crisis has greatly affected the country because it is mainly an export driven economy. This implies that some businesses in the country are closing up while others are underperforming. Another factor that has contributed to the slow growth is the gradual increase in the neighboring China’s progress towards a demand driven economy (Global Trade, 2012). The political tension that comes from North Korea is not helping matters too.

An analysis of South Korea’s gross domestic product (GDP) indicates that there is growth albeit it occurs at a slower rate than is desired. Exports continue to deliver but these too are slowing down. This is according to the South Korean Central Bank, which had responded to the slow growth by lowering its rates by 25 points (Global Trade, 2012). According to the Bank, exports were still making remarkable progress in recovering despite the slow economic growth (Global Trade, 2012). Financial indicators related to domestic growth fluctuated between improvement and deterioration. The report by the Bank also forecasted a negative output of the economy owing to the weakening of the Japanese Yen as a consequence of the slow recovery of the global economy, and the geopolitical risk that hang over Korea (Global Trade, 2012).

South Korea also has a stable external sector with reoccurring surpluses in the account balances, all which translate to a low external debt and adequate international reserves. The optimally performing public institutions and the low public debt also make South Korea a strong market (Global Trade, 2012). South Korea, as mentioned at the onset, is majorly an export economy. Hence, the overwhelming dependence on exports and bulky financing needs of the banking sector expose the country’s economy to external disruptions such as the financial crisis that hit global markets (Malhotra, 2014). South Korea’s Korea Composite Stock Price Index, KOSPI SK Hynix reported returns of 0.7% and 4.8% in 2013 and 2014 respectively and the figure was up by 5.43% year-to-date in 2015. The ever-increasing household debt is gradually lowering the domestic consumption. These factors coupled with the export dependency have increased the sensitivity of the economy to crises (Matsuo & Colomo-Palacios, 2013).

The main sectors of investment in South Korea include manufacturing, trade and maintenance, hotels and catering, information and communication, and transport and storage. Potential sectors for investment include the aerospace, automobile & autoparts, biotechnology, display, environmental industry, IT industry, logistics, nanoindustry, new and renewable energy sources, R&D, real estate development, semiconductor, SOC, tourism, venture industry.

In 2014, the Bharatiya Janta Party (BJP) led by Modi clinched a win in the elections in a sweeping victory that reignited hope in investors as far as the country’s economy was concerned. The governments has demonstrated its commitment to developing an environment that addresses concerns of foreign investors and make the country more business-friendly to them. India’s economic growth, on the other hand, is fuelled by favourable demographics, the rise in consumerism, cheap oil prices, a pro-active government that promotes Indian products as illustrated by the ‘Made In India’ slogan, and other initiatives (Kim, 2015). India has registered an annual average growth of 7% since 2000 to 2014, and the pressure is on the government to keep that record going (Yalama & Celik, 2013).

India’s stock market index S&P BSE Sensex reported that the country had registered annual returns of 25.7%, 8.98%, and 29.89% for the years 2012, 2013, and 2014 respectively. A year to date in 2015, the markets have been down by 1.83%. These figures demonstrate that India is a dynamic emerging economy and has a lead on China. The market is thus the fastest in terms of expansion. As the world’s largest economy, India has a population of about 1.25 billion people and about half of this figure represents the youth under the age of 25 years (Pradeep & Basy, 2004). This population is business-minded and values education. As aforementioned, after the 2014 elections, Modi vowed to reform the economy to provide opportunities to the many industrious Indians.

India has a GDP that is almost a third that of Brazil and half of China’s value. The low oil prices that the country imports oil with acts in favor of the country because India imports about 80% of its oil (Jayasuriya, 2011). Bureaucracy and graft have in the past threatened the health of the economy but this has since gown down after the formation of the new government. The growth of the stock market implies that the rupee continues to strengthen and the market will stabilize gradually. However, as is the case with huge growth potentials, there are usually greater risks involved. Thus, for those investors looking for short-term investments, a volatile market is not one they can look into.

The major sectors for investment include the service industry, construction, telecommunications, IT and Software, drugs and pharmaceuticals, trade, chemical products, metallurgy, and energy sectors. The national economy is boosted by the agricultural sector, whereby the country is the fourth largest agricultural power globally. Two-thirds of the active population are employed in this sector. The high potential sectors that may interest foreign investors include Airport & Ground Handling, Computer and Peripherals, Education Services, Electric Power & Transmission Equipment, Food Processing, Machine Tools, Medical Equipment, Mining & Mineral Processing Equipment, Oil & Gas Field Machinery, Pollution Control Equipment, Safety & Security, Telecommunications Equipment, Textile Machinery, Water and Sustainable energies.

Investors are assessing the current security problems that are facing the developed markets ranging from terrorism to credit crunches and have reconsidered investment in businesses in the region. Investors are currently looking at emerging markets and their stock because the emerging economies have outperformed their developed peers. The stocks appear to be outperformed those in the developed countries and present prospects of higher earnings (Fabozzi & Peterson, France: Capital markets, financial management, and investment management., 2013). Initially these markets had been overwhelmed with rising inflation, stunted growth, and significant currency shakeout. However, the reverse of this trend appears to have taken effect and these markets look attractive to investors interested in equities.

Picking an emerging market fund is a sure bet among investors because majority of them adhere to or outperform the MSCI Index. Thus, it is lucrative because it is not necessary to diversify the investment portfolio to include several emerging markets. After, the 2008 financial crisis, many countries seized the opportunity to grow their economies with the rise in prices of commodities. These countries invested in creating government jobs and subsidies that grew their economies at a quickened pace. This allowed citizens in these countries to buy imported goods and the result was that inflation grew considerably as was the case in Hungary, Brazil, Turkey, Malaysia, and Russia (Fabozzi, 2013). Governments countered this by increasing foreign investment by keeping low interest rates, increasing inflation but the economic growth that was achieved cannot be ignored. However, people learnt from the crisis and saved. When prices of commodities fell, the currency values fell and the final result was that the countries made wise choices and moved out of the recent financial crisis of 2014 a lot quicker.

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