Long-Term Investment Opportunities In Emerging Markets

By M. Isi Eromosele

Investors are attracted to where they can find opportunities for a potentially strong return boost, and we see developing economies as a powerful growth source. That’s not to say emerging markets are merely a hot-dot asset class.

Emerging markets have a long-term story. We expect to see economies shift from focusing on producing and supplying goods to budding consumer culture on the road to economic maturity.

Growing populations and young consumer bases that typically save and avoid debt are fundamental reasons to believe the emerging world will continue developing, providing long-term investment options.

While emerging markets aren’t a new asset class, they’ve garnered a new-found popularity. The mass appeal emerging markets has found with global investors coming out of the Great Recession isn't due to an economic cure-all that helped developing economies pull the globe out of its economic mire.

Fundamental fiscal changes stemming from harsh lessons learned during economic meltdowns, such as the Asian financial crisis in the late ‘90s, are what put emerging markets on surer footing.

Governments and companies alike have strong balance sheets due to a decade (perhaps longer depending on the country) of prudent decisions, which helped developing economies ride out economic difficulties and move out of recessionary conditions.

Despite their resilience in recent years, emerging markets companies have faced rising inflation and costs, along with generally slower export levels, which has partially stifled economic activity.

It’s important to remember that fiscal strength and growth potential don’t make for bullet-proof markets. For example, we see higher volatility levels in developing economies because they’re perceived as carrying higher levels of risk.

Participating In Emerging Markets

Investors can participate in emerging markets by investing directly in developing economies’ securities, while indirect participation in emerging markets comes from tapping into multinational corporations with global footprints.

Investing directly in emerging markets securities is simple enough to understand - invest in a company that is headquartered in a developing economy. It’s also the most efficient way to invest in emerging markets. With indirect investments, do note that the U.S. does not have a monopoly on global corporations that do business in developing countries.

International businesses are just as far reaching. European large-cap companies sourced more than 30 percent of their revenue from emerging markets during 2011. We see these trends in businesses like Volkswagen, the German car company that happens to be the top automobile manufacturer in China, a market where car purchases have been on the rise.

Important Issues To Understand About Investing In Emerging Markets

Investors should remember that emerging markets are complex, and each developing nation has an individual mix of factors that influence growth. So the drivers of each economy need to be examined.

It’s easy, for example, to generalize that emerging markets have export-oriented economies. But what are they exporting? China manufactures countless varieties of consumer products, while Brazil’s main exports are commodities, which means economic cycles will flow through these two countries and companies within them differently.

In addition to unique revenue streams, governments will have varying philosophies on how to boost growth, contain inflation and create sustainable economic models. Emerging markets, as their name implies, are developing and changing, so what drives growth now may not be as economically important many years from now.

The intricacies don’t stop there. Investors should remember that financial reporting policies are different, so financial reports produced in Thailand may appear significantly different from reports in Russia.

Fortunately, more and more companies are moving to International Financial Reporting Standards (IFRS), which are more similar to accounting principles used in the U.S. and that trend should provide investors with more uniform data to examine.

Knowing where business growth is truly coming from and how management teams use capital is an essential part of finding investment opportunities that have long-term growth potential. And this shift in accounting standards should be good for investors.

Key Considerations for Investing in Emerging Markets

• Exporting economies roll through market cycles at different paces
• Macroeconomic policies vary
• Evolving growth drivers
• Financial reporting standards are different

Investing in multiple countries also provides an advantage investors sometimes overlook - currency diversification. Exposure to a variety of currencies boosts diversification potential and gives portfolios an improved sampling of global economic cycles.

Investing in emerging markets simply as a short-term strategy is not wise. Invest and participate in emerging markets using a long-term bottom-up quality growth investment process that focuses on companies’ profitability, business practices and stock prices and the belief that the financial fundamentals of the emerging market companies and consumers are sound.

Additionally, investors should ensure their choices for participating in emerging markets make sense within their respective portfolio strategy.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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