Guide to Investing in Emerging and Frontier Markets

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Guide to Investing in Emerging and Frontier Markets


  • Investing in Emerging and Frontier Markets

  • Investing in Emerging and Frontier Markets

    Edited byKamar Jaffer



  • PublishedbyEuromoney Institutional Investor PLCNestor House, PlayhouseYardLondon EC4V5EXUnitedKingdom

    Tel: +44 (0)20 7779 8999 or USA 11 800 4379997Fax: +44 (0)20 77798300www.euromoneybooks.comE-mail:

    Copyright 2013 Euromoney Institutional Investor PLC and the individual contributors

    ISBN 978 1 78137 1039

    This publication is not included in the CLA Licence and must not be copied without the permission of the publisher.

    All rights reserved. No part of this publication may be reproduced or used in any form (graphic, electronic or mechanical, including photocopying, recording, taping or information storage and retrieval systems) without permission by the publisher. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered. In the preparation of this book, every effort has been made to offer the most current, correct and clearly expressed information possible. The materials presented in this publication are for informational purposes only. They reflect the subjective views of authors and contributors and do not necessarily represent current or past practices or beliefs of any organisation. In this publication, none of the contributors, their past or present employers, the editor or the publisher is engaged in rendering accounting, business, financial, investment, legal, tax or other professional advice or services whatsoever and is not liable for any losses, financial or otherwise, associ-ated with adopting any ideas, approaches or frameworks contained in this book. If investment advice or other expert assistance is required, the individual services of a competent professional should besought.

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  • vContents

    Foreword xvPreface xvii

    Emerging and frontier markets xviiHarnessing the potential of the middle class xviiRising capitalisation and increased diversification xviiiEmerging market debt xixA broader investor base xixCompelling valuations xxRisks in emerging and frontier markets xxConclusion xxi

    Acknowledgements xxiiiAbout the editor xxvAbout the contributors xxvii

    1 The growing weight and influence of frontier markets 1Dr Mark Mobius, Templeton Emerging Markets GroupTomorrows emerging markets 1A way to diversify 2Long-term growth potential 2Africa a continent of opportunity 3Risks investors should consider 5Liquidity and low market capitalisation 6On-the-ground research 6Accessing frontier markets 6Conclusion 7

    2 The outlook for emerging and frontier markets 8Charles Robertson, Renaissance Capital

    3 The role of emerging markets sovereign wealth funds 17Dr Eliot Kalter, E M Strategies Inc. and Dr Patrick Schena, The Fletcher SchoolIntroduction 17Minding the institutional void 18Surging SWFs in emerging economies and the paradox of outbound investment 22The development agenda and the tensions of inward investment 32Filling the void: reflections on a way forward 34

    4 The importance of micro, small and medium enterprises in emerging markets 38Khaleel Ahmed, IFCThe importance of small and medium enterprises 38

  • Contents


    Definitions 38Composition of the industry 40The missing middle 41Issues and challenges facing the SME sector in emerging markets 41

    The SME finance gap 42Non-financial barriers 45Weaknesses in credit delivery and support by financial institutions 45Policy interventions designed to expand SME finance 46The World Bank Group/IFC 47IFI engagement with SMEs 48

    Annex 4.1 50First mover advantage: Bank Muscat targeted Omans unbanked SME market 50Serving the female-headed SME segment: Access Bank Plc Nigeria 50ICICI Bank 51

    5 The regionalisation of emerging debt and equity capital markets 53Julian Perlmutter and Piers Summerfield, Simmons & Simmons LLPRecent developments and emerging trends in the dim sum bond market 53

    Steady growth of the young dim sum bond market 53Overview of the current dim sum bond market certain distinctive features 54

    The maturity profile of dim sum bond issuances 54The geographical diversification of dim sum bond issuers and investors 55More rated dim sum bond issuances 56

    Dim sum bond market trends in 2013 and beyond 56Recent developments and emerging trends in Middle Eastern debt capital markets 57Recent developments and emerging trends in Kenyan debt capital markets 61Recent developments and emerging trends in the Nigerian debt and

    equity markets 63Conclusion 65

    6 Risks and return expectations for emerging and frontier markets 66Allan Conway, SchrodersHistoric performance 66Near-term prospects 67Long-term outlook 72Risks 76

    7 Portfolio allocation, diversification and risks across emerging and frontier markets 78Matthew Annenberg and Robin Anderson, Principal Global InvestorsMotivation 78Diversification benefits and risks to frontier market investing 79Benchmarks 83Portfolio 89Conclusion 92

  • Contents


    8 Looking beyond external emerging market debt 95Michael Gomez, PIMCOLocal debt will continue to stand out 98Investment implications 100

    9 Exchange-traded funds and the opening up of emerging markets 101Manooj Mistry, Deutsche BankThe general benefits of accessing emerging markets via ETFs 101The challenges of creating ETFs on emerging markets indices 102ETF product structures 102Size, scope and turnover of the market 103Frontier market ETFs 106Active asset allocation to emerging markets using ETFs 106

    10 Market regulation and supervision in emerging and frontier markets 107Kai-Niklas Schneider, Clifford Chance LLP and Leen Qablawi, Latham & Watkins LLPIntroduction 107Emerging and frontier markets 107Regulatory approaches 108Basic principles 109Regulation in emerging and frontier markets 109Which approach works best? 111

    Principles versus rules-based approach 111One-size-fits-all approach 111

    Conclusion 112

    11 Growing power of emerging market titans 114Sohail Jaffer, FWU GroupRole reversal in emerging market foreign direct investment flows 114The growing importance of emerging market-based transnational corporations 114Go out 117Private equity and sovereign wealth fund drivers of FDI 117Outlook for increased south-south investment flows 118Commodity security as a driver of FDI 119Risks impacting FDI flows 120The risk of resource nationalisation 121Security concerns: real or imagined? 121

    12 Private equity in growth markets: changing patterns, emerging trends 124Sarah Alexander, The Abraaj GroupLessons from the first generation 125A fundamental and lasting shift 125Global growth markets opportunity 125Private equity access to the growth economy 126

  • Contents


    Institutional investor goals 126Industry maturation delivering returns 127Local support and participation 128A long runway 129Looking ahead market and fund-size diversification 129

    13 Doing valuations in emerging markets 130Pr-Ola Hansson, Ernst & YoungThe preferred approach to emerging-market valuation 130Why the DCF model is preferable for emerging markets 131Consistency and building in advantages 133Limits of the guideline companies/multiples approach 133The bridge: justifying paying a premium 135Summary 135

    14 Family businesses in emerging markets 136Antonios Koutsoukis, Credit SuisseAdvantages of family businesses 136Growing the family business 137Governance risks in family businesses 138Adapting to change 141Bibliography 142

    15 Growth of Islamic finance in emerging and frontier markets 143Baljeet Kaur Grewel, Kuwait Finance HouseIntroduction 143Global Islamic finance industry 146Islamic finance industry: products and services 147Islamic finance: key development in emerging markets 148

    GCC 148Saudi Arabia 149Oman 149Kuwait 149Qatar 149

    Turkey 150Asia 150

    Indonesia 150Malaysia 151

    Africa 151Nigeria 151South Africa 152Sudan 152

    Islamic Development Banks role in promoting Islamic finance and SMEs 152Outlook and potential for Islamic finance 153

  • Contents


    16 Verging on emerging: the reasons for surging investor interest in global frontier markets asset management 155

    David Wickham, HSBC Global Asset ManagementCommencement 155Classifications: what are frontier markets? 156Characteristics of global frontier markets: the 7Cs 158

    Comprehensive universe 158Change 161Consumers 163Commodity wealth 165Correlations 166Cash returns 168Cheap valuations 169

    Considerations: navigating the risks of global frontier markets 170Political risks 170Commodity risks 171Liquidity risks 171Sector risks 171Currency risks 172

    Capital allocations to frontier markets 173Conclusion 174

    17 Alternative investment landscape in emerging and frontier markets 177Ian Morley, Wentworth Hall ConsultancyIntroduction 177Substantial growth in emerging and frontier markets 178Emerging markets hedge fund performance by geographical area 179Type of strategies 181Challenges facing emerging and frontier markets 182

    18 Wealth management in emerging and frontier markets 184Justin Ong and Darja Habarova, PricewaterhouseCoopers LLPAsia the new diamond in the wealth frontier 184Asias growing financial centres for wealth management 185Emergence of the Asian regional players 186Investment preferences in wealth management in Asia 188Preserving wealth long-term in Asia 190The talent conundrum 191A bright future, or a sunset industry? 192

    19 Insurance in emerging markets 193Richard Holloway and Sanket Kawatkar, MillimanThe importance of life insurance in emerging markets 193Review of some of the emerging markets in Asia 193

  • Contents


    Insurance markets in India and Indonesia 196India 198Indonesia 199

    Future outlook and conclusions 200

    20 Project finance in Asian emerging and frontier markets 202Michael Barrow, Asian Development BankGood, bad and it depends 202Filling the gaps 203Broadening the funding sources 205Creating bankable projects 206In short 206

    21 Infrastructure funds in emerging and frontier markets 207Frank Kwok, Steve Gross and Melanie Gilmore, Macquarie Infrastructure

    and Real AssetsIntroduction the emerging market opportunity 207Challenges and characteristics of investing in emerging markets infrastructure 208

    Long-term planning 209Regulatory risks 209Track record 209Environmental and social concerns 210Lack of resources and experience 210

    Investing in emerging markets infrastructure 210Role of development banks and other multilateral institutions 210Investing through an infrastructure fund 211

    Characteristics and returns of unlisted emerging markets infrastructure funds 213Conclusions 214Case study: Philippines Investment Alliance for Infrastructure 215

    22 Oil and gas in emerging and frontier markets 216Meb Somani, Lakhbir Sandhu, and Andrew Grant, Barclays Natural

    Resource InvestmentsOpportunities in emerging markets for oil and gas investors 216What is an emerging market, from an oil and gas perspective? 217The challenges of oil and gas investment in emerging markets 218Managing oil and gas investment in emerging markets 219

    23 Renewable energy in emerging markets 221Yesim Bezen and Onur Oksan, Bezen & Partners and Claire WilbyIntroduction: renewable energy and sustainable solutions on the global agenda 221Building sustainable energy strategies 221

    Political support 222Investment and financial incentives 222

  • Contents


    Regulatory and legislative framework 223Potential of the green industry 223Use of natural resources 223

    Case study: Turkey 224First steps: the legislative framework 224Second steps: adapting the legislative framework 224Next steps: recognition of market reaction 225Adding a new element to get the right energy mix for Turkey: solar energy 227

    Conclusion 227

    24 Telecom tower transactions in emerging markets 229Federico Membrillera, Victor Sunyer and Kamal Daswani, Delta PartnersRecent trends impacting operators appetite for tower transactions 229Recent trends in tower investment in emerging markets 230Opportunities for tower management companies 233Opportunities for financial investors 234Innovative tower sharing models in emerging markets 235Key challenges in tower transactions in emerging markets 236Conclusions 238

    25 Spotlight on China 239BOCI-Prudential Asset Management LtdIntroduction 239The rise of the onshore equity market in China 239Move towards a multi-tier stock market 241Into stock futures and derivatives 243The IPO market and fund industry 244Opening domestic equity market to foreign investors: QFII and RQFII 246Complementary development of fixed income market 247The development of offshore equity market 248Conclusion 251

    26 Spotlight on Indonesia 252Douglas Clark Johnson, Codexa CapitalIndonesia: high-fashion for a reason 252Story distinguished by domestic demand 253Macro analysis: the good news and the bad 254Islamic finance: fresh perspective on reform 255Investment outlook: across the board potential 256

    27 Spotlight on India 260Karuna Luthar, Elara CapitalIntroduction 260Young and able workforce 261

  • Contents


    Huge potential for consumption 261Women: an opportunity in waiting 262Savings: help or hindrance 262Poverty 262Literacy rates 263Resources 264Infrastructure 264Transparency and governance 265Policies: reduction in subsidy bill 265External factors 266Comparative yields and growth data 266Conclusion 267

    28 Spotlight on Latin America: opportunities and challenges in Brazil and Mexico 268Gray Newman, Morgan StanleyBrazil: infrastructure prospects 268Mexicos moment 271Conclusion 274

    29 Spotlight on Turkey: searching for the correct growth model on the road to 2023 275

    Ertunc Tumen, Ak Asset ManagementTurkey gave a striking economic performance between 2002 and 2012 275High hopes for 2023 275But which model to follow? 275

    Following the BRIC model? 276Is the South Korean model a more realistic one to follow? 276An economic growth model in Europe? 277

    Could Turkey create an economic growth model of its own? 277A stable economic background and the financing of innovative investments 278Global science and technology leadership to be required in certain areas 278Techno parks: a right step, but more progress required 278Rise of the Anatolian tigers the dawn of a new entrepreneurial spirit 278Other challenges 279Conclusion 279

    30 Spotlight on Iraq...


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