Investors: Look Beyond Short-Term Strife in Emerging Markets
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This summer is turning out to be a somber one in many emerging markets. Recent slowdowns in China, India, South Africa and other developing nations have shaken investor confidence in the post-recession global economy. Political strife is adding to the grim situation and depressing hopes of a bullish rise in the near term. Consider:
- In Britain, the recent Brexit vote initiated a market plunge and chilled relations across the European Union.
- In Brazil, Senate impeachment proceedings are in motion against President Dilma Rousseff. The speaker of the Lower House has also been suspended, complicating the succession question if Rousseff is forced out of office.
- In Argentina, there are demands for the resignation of President Mauricio Macri, who had been in power only five months when the protests began over his possible ties to the Panama Papers corruption scandal.
- In Venezuela, that nation’s economic crisis continues to incite anti-government sentiment, while President Nicolás Maduro now faces the threat of impeachment, as well.
- In South Africa, President Jacob Zuma dodged impeachment this past April, but he’s still plagued by corruption allegations. The widening rift between the ruling African National Congress and the Economic Freedom Fighters hasn’t helped matters.
It almost seems like the current political volatility spans the entire globe, undermining efforts to prop up faltering economies and scaring investors away from emerging and frontier markets.
But success in these markets requires a long view. Investors should be more worried about the current panic blinding them and causing them to miss out on long-term opportunities on the horizon.
Overstating the risks
Whenever political or economic dust-ups occur in emerging markets, investors get nervous. Outside observers overstate the risks, and everyone assumes the worst. But it’s crucial that investors look beyond the fearful headlines and see the reality of these situations.
Brazil and Argentina are good illustrations: They are South America’s largest and third-largest economies, respectively. Their cumulative GDP is about $2.9 trillion, roughly the same as the economies of France and the U.K.
São Paulo, Brazil, in fact, came in 12th in the Global Startup Ecosystem Ranking 2015, making it comparable to Paris and Singapore.
Yes, there are problems in Brazil and Argentina right now. But they will remain smart investment prospects for the next several years, as will several other South American economies. South America as a whole is on the rise, and investors need to look beyond the current hysteria to see what they can achieve when the political dust settles.
Africa’s investment promise
Then there's Africa: Investors there have taken a more cautious position on its major markets since the Doha talks collapsed in April. The talks were meant to cap output in major producer states, and fears of ongoing fiscal challenges arose when the discussions fell apart. However, the failed talks provide an opportunity for a much-needed policy rethink and a rebalancing of these economies away from oil.
Angola’s U-turn on fuel subsidies in 2014 marked a major turning point in fiscal policy for the country that is Africa’s second-largest oil producer. That paved the way for a $650 million investment in Angola’s agricultural sector, from Hasan Group and Forever Green. Ongoing efforts to diversify Africa’s oil-dependent economies have unleashed enormous investment opportunities in non-oil industries.
Regional integration will also provide a boon to labor and consumer markets. Ghana recently eliminated visa requirements for all African citizens, setting a precedent for free movement across borders. This bodes well for discussions around the proposed Tripartite Free Trade Area, which would incorporate the East African Community, the Common Market for Eastern and Southern Africa and the Southern African Development Community.
Across Africa, another consideration is central banking, which is taking on new meaning, as key exports markets such as China disappoint and policy-makers ponder ways to stimulate domestic consumption. Kenya, for instance, is working to lower the cost of credit. Improved financial products and access to credit will create unlimited potential in Africa during the next decade.
So, what are "next steps" for investors? While the current landscape seems dire, real opportunities for investment exist in these difficult regions:
1. Consider Brazilian exports.
As investors contend with disappointing domestic demand stemming from the economy’s anemic performance, the weakened currency creates an opportune environment for investors to tap into the export market. The presence of Apex-Brasil, the body tasked with fostering the competitiveness of local companies abroad, widens investors’ potential reach across the globe.
2. Look to positive relationships with Spain.
While Brazil has endured recent hardships, Spain’s economy has made a powerful recovery of late. Businesses can also leverage the recovery of Spain’s economy, given recent commitments by the two countries to foster bilateral ties and double trade by 2025.
3. Explore smaller markets with bigger prospects.
In Africa, the slump in markets such as Nigeria, Ghana and South Africa has allowed smaller pockets of growth -- such as Côte d’Ivoire, the Ivory Coast -- to spring to the forefront, creating an opportunity for investors to rebalance their footprints on the continent.
In May, the West African economy indicated plans to liberalize electricity and water distribution, raising hopes for a more solid infrastructure. Investors should not overlook such markets, which are increasingly providing satellite hubs away from traditional favorites that are currently stumbling.
Bold reforms are under way in emerging markets such as Brazil and Argentina, and frontier markets such as Nigeria and Ghana. Tumultuous as they may seem, these reforms would not have been possible in rosier macroeconomic environments. Investors willing to take on short-term risk can ride the tide of change that will likely carry in bountiful returns in the years to come. Political strife should not be their only measuring stick.