Emerging and Frontier Markets

  • Published on
    12-Apr-2017

  • View
    77

  • Download
    1

Embed Size (px)

Transcript

  • Emerging and Frontier Markets

    BEFM013: Investment Instruments

    Dr. Rohit Sonika

    Business School

    University of Exeter

    17th October 2015

    E. Ang 000347

    J. Xiao 017209

    Y. Abbas 002415

    Z. Liu 012946

  • Page 2 of 46

    Abstract

    In this essay, we will provide an overview of three different kinds of economies:

    Developed Emerging, and Frontier Markets. We will then look at a small selection

    of each kind of economy, state their basic characteristics, and offer a breakdown

    of each countrys economic sectors. Finally, we will compare and contrast the

    markets, to illustrate the differences between each type of economy. Kindly note,

    that we have included the three economies of developed countries to set a

    benchmark to be compared to the emerging and frontier markets.

  • Page 3 of 46

    Table of Contents 1. Introduction ............................................................................................................................................... 5

    2. Emerging Markets.......................................................................................................................................... 6

    2.1 Why Emerging Markets are Appealing to Investors ................................................................................ 7

    2.2 Risk in Emerging Market .......................................................................................................................... 8

    2.2.1 Political and Sovereign Risk .............................................................................................................. 8

    2.2.2 Volatility ............................................................................................................................................ 8

    2.2.3 Liquidity ............................................................................................................................................ 9

    2.3 China ........................................................................................................................................................ 9

    2.3.1 Business Culture and Issues ............................................................................................................ 10

    2.3.2 Market Sectors ............................................................................................................................... 11

    2.3.3 Trade Balance ................................................................................................................................. 11

    2.4 Turkey .................................................................................................................................................... 12

    2.4.1 Business Culture ............................................................................................................................. 12

    2.4.2 Market Sectors ............................................................................................................................... 13

    2.4.3 Trade Balance ................................................................................................................................. 13

    3. Frontier Markets .......................................................................................................................................... 14

    3.1 Why Frontier Markets Show Appeal ..................................................................................................... 15

    3.2 Risk Analysis for Frontier Markets ......................................................................................................... 16

    3.2.1 Political and Sovereign Risks........................................................................................................... 16

    3.2.2 Volatility .......................................................................................................................................... 16

    3.2.3 Liquidity .......................................................................................................................................... 17

    3.2.4 Corruption ...................................................................................................................................... 18

    3.3 Nigeria ................................................................................................................................................... 18

    3.3.1 Market sector ................................................................................................................................. 19

    3.3.2 Business culture .............................................................................................................................. 19

    3.3.3 Investment Characteristics ............................................................................................................. 19

    3.4 Saudi Arabia ........................................................................................................................................... 20

    3.4.1 Business Culture ............................................................................................................................. 21

    3.4.2 Market Sector ................................................................................................................................. 21

    3.4.3 Investment Characteristics ............................................................................................................. 21

    3.5 Croatia ................................................................................................................................................... 23

    3.5.1 Business Culture ............................................................................................................................. 23

    3.5.2 Market Sectors ............................................................................................................................... 23

  • Page 4 of 46

    3.5.3 Investment Characteristics ............................................................................................................. 24

    3.6 Concluding Frontier Markets ................................................................................................................. 25

    4. Developed Economies ................................................................................................................................. 25

    4.1 Norway .................................................................................................................................................. 25

    4.1.1 Business Culture ............................................................................................................................. 26

    4.1.2 Market Sectors ............................................................................................................................... 26

    4.1.3 Investment Characteristics ............................................................................................................. 26

    4.2 The United States of America ................................................................................................................ 27

    4.2.1 Business Culture ............................................................................................................................. 28

    4.2.2 Growth Engines: Research, Development, and Entrepreneurship................................................. 29

    4.2.3 Components of the Economy ......................................................................................................... 29

    4.2.4 Investment Characteristics ............................................................................................................. 29

    4.2.5 Capital Flows ................................................................................................................................... 31

    4.3 Japan ...................................................................................................................................................... 31

    4.3.1 Market Sectors ............................................................................................................................... 32

    4.3.2 Investment Characteristics ............................................................................................................. 33

    5. Compare and Contrast................................................................................................................................. 35

    6. Conclusion ................................................................................................................................................... 38

    References ....................................................................................................................................................... 40

  • Page 5 of 46

    1. Introduction

    The global economy has classified its markets into two main categories: developed markets, and

    emerging markets. Before the term emerging markets was coined, these countries were referred to

    as Less Economically Developed Countries LEDC. The term LEDC did not have a positive

    connotation, and it neglected to describe the potential of these markets, and thus, by the 1970s, the

    name was changed to Emerging Markets (NASDAQ). Those two market classifications

    Developed and Emerging have been put in place based on certain economic characteristics each

    individual country enjoys. For example, developed markets are characterized by their high credit

    worthiness, their regulatory authorities active role, free and developed trade markets, and

    transparency of market information and trade reporting process, to name a few factors (FTSE, n.d.).

    The remaining markets were labelled as emerging markets. With this formation many economies

    that enjoyed different qualities, some more advanced than others, were pooled under the same

    category. In the 1990s, a member of the International Finance Corporation, Mrs. Farida Khambata,

    came up with the term Frontier Market (NASDAQ, n.d.), which would separate emerging markets

    into two categories, emerging and frontier markets. The classification of these countries was based

    on their market structure and potential.

    Now, emerging markets are known for their established financial infrastructures, and are constantly

    progressing towards becoming developed economies (Investopedia). Markets that are classified as

    emerging share the following characteristics: They have established regulatory bodies and market

    exchanges, and liquidity in both debt and equity markets (Investopedia). Emerging markets are also

    considered an indicator of the worlds economic growth, because they hold around 80% of the

    worlds population (Investopedia). Markets like Brazil, Russia, India and China, also known as the

    BRIC nations, are great examples, used to illustrate the potential and power some emerging markets

    have. The BRIC countries are documented to have some of the fastest-growing economies in the

    world, while also being home to around 3 billion people, almost half of the worlds population

    (Economy Watch). A Goldman Sachs study believed that by 2041, but later altered to 2032, the

    BRIC nations will continue growing to the point where not only will they become developed

    economies, they will also overtake the current market leaders (Financial Times).

    Frontier markets, on the other hand, are characterized as countries with poor liquidity, unstable

    currencies, almost non-existent stock market, and inadequate regulations (Investopedia). Another

    distinction of frontier countries is that their economies are not as dynamic as the developed and

    emerging markets. Frontier markets are usually dependent on oil or other single commodities

  • Page 6 of 46

    (Interactive Investor). Although the qualities of frontier markets may not seem as attractive as

    developed and emerging markets, their constant growth along with their high potential may make

    them attractive to passive investors. For example, countries such as Bangladesh and Nigeria have an

    outstanding index growth by the second half of 2014 of around 34.2% and 32.5% respectively

    (Interactive Investor). The high gains, accompanied by a relatively young population with the

    ability and potential to grow, will cause some investors to see frontier markets as potentially

    lucrative markets for investment.

    So, with the constant development in our global markets, investors must understand the differences

    between the three main economic markets (developed, emerging and frontier); they must also have

    the ability to analyse the key aspects and differences of developed markets (such as Norway, USA

    and Japan), emerging markets (such as China and Turkey), and frontier markets (such as Nigeria,

    Saudi Arabia, and Croatia).

    2. Emerging Markets

    In general emerging markets are markets that are less mature than the developed markets. One

    common characteristic of emerging markets is market freedom. Commonly, emerging markets have

    high levels of government intervention and control along with low information transparency and

    high insider trading. Developed markets on the other hand, are controlled by market forces, such as

    supply and demand, enjoy high levels of transparency and flow of information and have strict laws

    prohibiting insider trading. Emerging markets are classified based on some common characteristics

    such as, lower than average per-capita income, rapid growth rates (since their economies are not

    well established, sometimes minor implementations may be reflected in substantial growth), and

    high sensitivity to volatile currency and commodity prices to name a few (About).

    One thing to keep in mind is that not all emerging markets share the same characteristics and they

    may also very in terms of global economic influence. For example, in 2002 a Chief Economist at

    Goldman Sachs, named Jim ONeill, picked the four top performing emerging countries, which

    were Brazil, Russia, India and China, and named them the BRIC nations. These four countries were

    chosen based on their high GDPs, rapid growth rates, global economic power and potential to

    become developed markets in the upcoming years (FT). It is also worth noting that by the end of

    2010 South Africa joined the top four nations and was later called BRICS.

  • Page 7 of 46

    The rapid growth of emerging markets can be summarized in the chart below (Figure 1).

    Figure 1

    2.1 Why Emerging Markets are Appealing to Investors

    The general concept of higher risk higher return is perfectly displayed when comparing developed

    markets with emerging markets. The Cumulative Index performance graph of the gross returns of

    the both the developed and emerging market indices below shows a perfect example of why

    investors would prefer to invest in emerging markets. Emerging markets have been out performing

    the developed markets since 2001. In 2015 market returns in emerging markets where 65.2% higher

    th...

Recommended

View more >