The good, the bad and the ugly of emerging markets and investing
Comment of the Day

July 16 2014

Commentary by David Fuller

The good, the bad and the ugly of emerging markets and investing

Here is the opening from this informative column by John C Hulsman for The Telegraph, for which I am using the printed version rather than the online headline:

There can be no doubt that the rise of emerging markets is a game-changer for global geopolitics. The historical headline of our time will read that 500 years of Western economic and political dominance has come to an end.

But for investors to truly understand today’s world they cannot simplistically lump emerging markets together, as the countries’ economic and political trajectories have become so very different. It is therefore time to move beyond the Brics concept, brilliantly coined by Jim O’Neill, the former Goldman Sachs economist.

I propose, instead, a fresh way of looking at the world’s fast-growing economies: the Sergio Leone model, named for the peerless Italian director of spaghetti westerns. The future for some emerging markets will be good, for others bad, and for yet others ugly. Disaggregating them will amount to the holy grail for global investing.

The stark reality is that the Brics (Brazil, Russia, India, China and South Africa) have not weathered the Great Recession in equal shape. Despite its many and real problems, China comes out of the maelstrom relatively stronger, its overall growth rate holding up, particularly in comparison with sclerotic Europe and its emerging market competitors. In contrast, the shine is off both South Africa and Brazil, while beguiling India, with the stunning recent election of Narendra Modi as Prime Minister, is again looking like it’s about to take off.

The past few years have made a mockery of the idea of the uniform rise of emerging markets. And so we must take the Leone challenge, looking for winners and losers, and identifying the reason for their radically divergent performances.

David Fuller's view

Here is The Telegraph article.

John Hulsman is right to point out the vast differences among emerging markets.  Fortunately for investors, it is not all that difficult or complicated to recognise the crucial factors which separate relative winners from losers.  There are six important measures, in my opinion, and one of these is by far the most important.

1) Valuations – you will not go too far wrong, on average, by buying low and selling high.

2) Resources – an abundance of natural resources is a considerable advantage, provided it does not become a ‘lucky curse’ by stifling innovation and incentives.

3) Education - all countries need a smart, well trained and disciplined workforce at all levels.

4) Infrastructure – which is essential for commercial efficiently.

5) Female emancipation – yes, most young women become mothers but countries which suppress their women lose approximately half of their intellectual capability in addition to manual skills.  

6) Good governance – nothing could be more important because visionary leaders of integrity and economic sophistication are essential to propel their countries along the path of economic growth and development.  Governance is Everything!

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