Emerging Economies – Black Holes or Treasure Troves?

April 24, 2016
William A. Wheatley

Exploring Financial Strategies and Economic Insights

This blog explores the dual perspectives on emerging economies, often characterized as either potential 'black holes' or 'treasure troves.' It discusses the significant growth potential these markets offer, driven by young populations, increasing industrialization, and rapid technological adoption, juxtaposed with the risks of political instability, economic volatility, and regulatory challenges. The analysis delves into specific case studies of countries that have managed to harness their potential to attract foreign investment and boost economic growth, while also highlighting others where foreign investments have suffered due to corruption and mismanagement. The blog argues that while the risks are non-negligible, the long-term rewards of investing in these markets can be substantial if approached with a well-informed strategy that includes thorough due diligence, local partnerships, and a clear understanding of the socio-economic dynamics at play. It calls for a balanced approach, suggesting that labeling emerging markets broadly as either black holes or treasure troves oversimplifies the complexities and unique opportunities each country presents.

It is often said that there is no gain without risk. The greater the risk, the greater the potential gain; and the greater the potential gain, the greater the potential risk. Investors look to emerging economies because the potential for gain is great; but at the same time, the potential risk is great. Until just recently, the investment world looked to the BRICS group of emerging markets to produce much of the growth for the world economy, and these five emerging markets played every-increasing political roles in the world due to their growing economic clout.

A look at Brazil, the “B” of the BRICS group, gives rise to concern. President Dilma Roussef just lost an impeachment vote against her, and this shows just how far Brazil’s current government has fallen in recent years. Since she took office, President Roussef has faced a host of problems, many of which are the direct result of her and her party’s leadership. The largest of these problems is corruption, which has been the undoing of many regimes in Brazil. Now, the massive Petrobras scandal has destroyed the credibility of the government and, in particular, of President Roussef. The scandal has created a loss of confidence in the Brazilian economy, plunging the nation into a recession, one of the worst in Brazil’s recent history. Shortly before, Brazil believed it was positioned for a long period of China-like rates of economic growth, allowing the country to play a dominant role in Latin America and giving it a major voice on the world stage. Instead, thanks in large part to President Rousseff’s government’s lackluster performance and corruption, Brazil has fallen further behind most of the world’s other leading powers in political power and economic development. Rousseff appears to be on the way out. Last weekend, the lower house of Brazil’s parliament voted in favor of launching impeachment proceedings against her, easily exceeding the two-thirds’ majority required to do so. This motion will now go to the Brazilian Senate, which is expected to suspend President Rousseff for the duration of the trial, and then to sit in trial over her next month. President Rousseff has countered by accusing her political opposition of staging a coup.

India and China continue to meet expectations, despite China’s recent slowdown and India’s struggle with internal divisions; and Russia continues to play a greater role in many of the leading political and security issues facing the world today, despite its recent economic woes. However, the woes of Brazil and South Africa show that they have undoubtedly failed live up to expectations on the political and economic fronts in recent years. For both countries, much of the blame lies with their political leadership, which has led both countries astray. Unfortunately, this poor political leadership has caused great harm to both countries and could result in long-term loss of power and influence.

South Africa, the smallest of the BRICS – and the least qualified for membership in such a group – has been backsliding in recent years. This is due largely to the disastrous leadership of President Jacob Zuma and the deep divisions that have emerged in that country’s dominant political party, the African National Congress (ANC). Of course, low natural resource prices have severely hurt the South African economy. However, the current government there has failed to take the steps needed to diversify the country’s economy away from its dependence upon natural resource exports, and instead has rolled back many of the programs that had been enacted by its predecessors. Meanwhile, President Zuma also has faced a number of corruption scandals in recent years that have weakened his ability to govern South Africa. As a result of these economic struggles and corruption scandals, South Africa has found it more difficult to play the leading role in Sub-Saharan Africa that it has sought to do since the end of apartheid.

The problems facing Brazil and South Africa are clear examples of how poor governance (corrupt governance that does not understand the market economy) can squander massive economic and resource advantages. Brazil and South Africa are both incredibly rich in natural resources. In Brazil, President Rousseff’s disastrous leadership has caused Brazil’s failure to take advantage of its huge resource and demographic advantages that are in many ways similar to that of other large “New World” economies. Meanwhile, although South Africa has great resource and infrastructure advantages over many of its emerging market rivals, President Zuma’s numerous missteps are squandering these advantages. As a result, South Africa is losing political clout in its region, while its economic lead over its neighbors is shrinking. While both presidents are nearing the end of their reigns, both countries have the opportunity to elect more capable leaders. Nevertheless, the opportunities wasted by both countries could have long-term consequences, both within their borders and across their respective regions.

So, what is the interested investor to do? An investor may park his or her funds in more predictable economies, minimizing the investment risk. Alternatively, the investor can perform thorough research and invest carefully in the BRICS, being careful to hedge the bets. Some investors, instead of investing in companies in these countries, invest directly, creating industry in those countries. That can have a high degree of risk, but also a very high level of reward. The BRICS are like diamonds in the rough – indistinguishable to the untrained eye from clear quartz.

Image credit: http://static.rappler.com/images/Diamonds%20South%20Africa%20hands%20AFP.jpg

Disclaimer: This article discusses certain companies and their products or services as potential solutions. These mentions are for illustrative purposes only and should not be interpreted as endorsements or investment recommendations. All investment strategies carry inherent risks, and it is imperative that readers conduct their own independent research and seek advice from qualified investment professionals tailored to their specific financial circumstances before making any investment decisions.

The content provided here does not constitute personalized investment advice. Decisions to invest or engage with any securities or financial products mentioned in this article should only be made after consulting with a qualified financial advisor, considering your investment objectives and risk tolerance. The author assumes no responsibility for any financial losses or other consequences resulting directly or indirectly from the use of the content of this article.

As with any financial decision, thorough investigation and caution are advised before making investment decisions.