Firms Have to Approach Emerging Markets as Investors, Not 'Tourists' As long as investors keep hopping from one country to the next, they perpetuate the cycle of capital flight from areas that desperately need cash and continuity.
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Recently, emerging markets have looked more like a game of musical chairs than rich investment landscapes. Every time the music stops due to one crisis or another, investors hastily depart, bound for some other, more stable country, scrambling to fill the limited seats available there.
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Just over the course of 2016, this "game" exhibited itself during the volatile first quarter, in China and Brazil; it's continued this summer with Nigeria's devaluation of the naira.
And what's resulted has been that the uncertainty in these and other emerging markets has prompted investors to behave somewhat like tourists, dipping their toes into potential opportunities but never taking the plunge. And that's not smart, considering that the Institute of International Finance, reported, for example, that during this year's first quarter, China's net capital outflow stood at $175 billion, up $10 billion from the same period just last year.
South Africa also saw massive outflows in equities and bonds this January. Such activity indicates a short-term focus that's exacerbating instability in emerging markets.
In short, as long as investors continue hopping from one country to the next, they'll perpetuate this cycle of capital flight from areas that desperately need cash and continuity. Instead, both investors and governments must take a long-term approach that blends macroeconomic and microeconomic adjustments.
A call for state-investor realignment
On the macroeconomic front, governments must mitigate the effects of periodic economic slumps. These downturns scare away investors who have low risk tolerance and a subconscious bias against emerging markets. As a result, the contagion quickly spreads -- even to those with the stomach for uncertainty.
State agencies have begun to appreciate the value of flexible policymaking in the face of volatility, as was the case with China's stock market intervention this January. Central banks in many of the world's major economies moved to quell volatility in the wake of the Brexit vote, as well.
If more governments implement protocols for intervention, investors will gain confidence in emerging markets and the "tourist" effect will fade.
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Investors have a significant role to play on the microeconomic landscape. These three steps can help along the way:
1. Examine and take the long view.
Firms must gird themselves for stormy weather and focus on long-term strategies. The glut of short-term investments only creates more noise, making it difficult to predict how economic development will play out over extended time lines.
Take Nigeria, for instance, where 11 percent to 18 percent of urban households earn $10,000 or more per year and are expected to drive consumer-facing investments during the next decade. Nigeria's formal retail segment is extremely small at the moment, responsible for only 2 percent of aggregate retail transactions.
That sector is poised for explosive growth, but it won't happen without some pains along the way. However, investors who take the long view will be rewarded for staying the course.
2. Do the extra-credit homework.
Of course, long-term strategies must hinge on in-depth market analysis and research that emphasize growth and sustainability. Most emerging and frontier markets are only just beginning to develop robust retail segments, and growth won't always be a straight line. Many opportunities that appear straightforward on the surface will require fortitude and constant adjustment to keep pace with consumer and regulatory shifts.
Walmart's entry into the African retail space, for example, is quite telling about the extent to which investors need to be forward-looking and attentive to local dynamics. The retail giant began its expansion by acquiring a majority stake in South Africa's Massmart Holdings Limited, which gave it a foothold in East Africa. This sort of tiered, multiyear approach can help reverse the "tourist" mindset investors have displayed.
3. Rebalance for variety.
Investors spent much of the past decade focused on geographically huge countries rich in resources, like Brazil, China and India. By rebalancing their portfolios across other emerging and frontier markets, this firms will diversify their risks and help reduce "tourist" investing.
Countries such as the Philippines and Morocco offer incredible investment opportunities for those willing to look beyond the go-to locations. More importantly, the inclusion of regional blocs, rather than specific countries, increases the likelihood of success. For example, the East African Community -- which includes Kenya, Tanzania, Uganda, Rwanda, Burundi and South Sudan -- boasts a population of more than 145 million people and ever-increasing disposable income.
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The sooner the "tourism" approach is eliminated, then, the stronger these economies will grow and the more likely investors will be to see significant returns. Shifting even just some of the emphasis from China and Brazil to other areas represents a fundamental step toward integrating and stabilizing emerging markets. Is your company paying attention?