Growth versus investment potential for emerging markets

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Outcome of BRICS trade ministers meeting

“There’s the growth story, and clearly these countries do have very, relatively speaking, robust growth outlooks but there’s an investment story and we shouldn’t confuse the two. The best example of this has been China. China’s had phenomenal, rampant growth but it’s been a terrible investment story from an equity perspective,” Frontier Advisory’s chief executive, Martyn Davies, told CNBC Africa.    

“How do you have strong growth but declining equity markets – that’s the China story. There’s the growth story which is largely consumer-facing enterprises, which these countries most certainly have, and there’s the equity investment story which is obviously quite different. Let’s not equate the two.”

In 2001, then Goldman Sachs economist, Jim O’Neill, coined the term ‘BRIC’ to highlight Brazil, Russia, India and China’s potential as emerging economic powerhouses. Each of the four country’s fall within the top 10 most populated countries in the world and have been tipped for growth going forward.

Almost a decade later, South Africa was added to that group and it became known as BRICS. O’Neill however made known that he did not see how the African country could form part of the group as its population was significantly smaller than its BRICS counterparts.    

O’Neill recently announced the development of another emerging market group to rival BRICs, a group which he has dubbed, MINT. It comprises of Mexico, Indonesia, Nigeria and Turkey.

“Jim O’Neill created this BRICs acronym which was sort of an A-Team of leading emerging markets, based largely on demographics and their growth trajectories, almost as a new destination for capital for investment going forward. Jim O’Neill came up with the N11 as the Next 11 and he’s refined that further to come up with MINTs – this [is the] new B-Team, if you will – new, emerging, slightly smaller but still interesting, exciting markets going forward,” Davies explained.

“This is headlining, perhaps more bluster than it is substance. All these economies clearly are very different and unique in their own way. Can we all be grouped together? Well, unfortunately we still talk about emerging market risk. It’s very simplistic, it’s very generic. Unfortunately the investment community still largely see the world in very generic terms and this is a prime example of it. Everyone’s a stand-alone investment case and people need to be cognisant of that.”

Davies added that despite their potential for growth, investors are still weary of emerging market risk and have thus opted to enter these markets through an already established business.

“When ones exposed to these relatively robust growth markets, you want to buy well-governed companies, typically and often western exchanges, with strong footprints in these emerging-market economies,” he said.

“All five of these countries coincidentally are going through elections of some form and that means heightened political risk at the worst possible time for them, particularly those in the Fragile Five and I think this acronym is being embraced quite enthusiastically now but give it a few weeks perhaps, maybe a more sober approach will be taken.”