27 March 2010

Investing in emerging markets

Peter Tasker is unimpressed with the prospect of investing in emerging markets.

“Academic studies have shown there is no positive correlation between GDP growth and stock market returns — if anything the correlation is slightly negative”

“The reason for this counter-intuitive finding is that you do not buy shares in the statistical construct known as GDP. You buy the shares of real world companies. In immature fast-growing economies, the companies that end up winning the struggle for survival may not even exist yet.”

“Rich and stable cashflows are much rarer in emerging economies than in mature economies. So even the companies that do survive and prosper — the emerging world’s emerging champions — will likely finance their growth by repeatedly raising large amounts of new capital. This is of no benefit to shareholders without an overall improvement in return on capital.”

“The macro picture is that emerging economies have large reserves of under-utilised savings and human resources. Moblising them is both the key to success and the guarantor of mediocre investment returns. Why waste time attempting to raise returns on your existing capital when you can easily access more?”

1 Busting the myth of the Brics, Peter Tasker, Financial Times, January 11 2010

d. sofer