In an increasingly multipolar world, there are twelve considerations (and three bonus ones) emerging market investors need to consider when looking at countries to invest in. My overall themes for country selection in a multipolar world are:
- Sovereignty – as in the ability to be independent and non-aligned.
- Self-sufficiency – as in natural resources, industrial capacity, demographics and human capital.
How countries rank on these considerations will impact asset allocation between the following categories:
- Passive Funds (as in ETFs)
- Active Funds
- Individual Stock and Bond Selection
NOTE: Emerging vs. frontier market classification by index providers (and how that impacts asset allocations to countries) warrants a separate post and detailed discussion.
Before I discuss the selection considerations and go through a list of various countries examining where they might stand on those criteria (and the implications for emerging market investors), I want to bring attention to an interesting Telegram post that had made the rounds on Telegram.
TRIGGER WARNING: Eurasia & Multipolarity is a pro-Russian Telegram channel. I found the points raised in their post (made in the the context of Russia with a pro-Russian viewpoint) relevant for selecting other emerging markets (the focus of my post) to invest in.
If you are the type of reader who is automatically triggered by coming into contact with ANY content that does not fit (official) western narratives on Russia (and you will have the desire to accuse me of being a Putin stooge or something in the comments!), I suggest skipping the Telegram post republished below [where all bold emphasis will be mine] and going straight to what I have written immediately following it (as the remainder of my post DOES NOT COVER RUSSIA – a country that will be closed to western investors for the foreseeable future):
In light of the Russian Special Military Operation in the Ukraine it became more and more clear that globalism is finished and only powerful sovereign nations will be able to survive in the 21st century, as president Putin stated recently.
Russia’s role in the new geopolitical arena is going to become increasingly important exactly because Russia has sovereignty (very few countries can take decisions based entirely on their national interestsinstead of abiding by the diktats of the US and supranational institutions, Russia is one of them) and most importantly has enough resources to be almost completely self-sufficient, in details:
_ Russia has enough oil and gas for hundreds of years, taking into account a reduction of the exports, both for households and industries
_ Russia has the larger fresh water reservoirs in the world (Lake Baikal for example)
_ Russia has enough uranium and plutonium to fuel its nuclear power plants for centuries
_ Russia has unlimited supply of iron, aluminium and titanium for its military industry (they are always necessity for weapons, ammunitions and carriers, as they cannot be replaced)
_ Russia has lot of gold and silver for its industries but also as key commodities (real money) in a world where Fiat currencies are destined to collapse in value due to enormous debts that cannot be repaid
_ Russia has large fields of corn, wheat and soyto feed its entire population without problems. What’s important is to strengthen industries, have more and more top quality scientists and create an integrated system where all sectors prioritize Russian internal growth/expansion rather than trying to export stuff facing unlimited hurdles.
The idea a strong Russia cannot be fully self-sufficient is just liberal/globalist propaganda but the Russian govt has to do whatever it takes to shift to this new model.
PS.: Russia will need some help from friends abroad in technology sector but it has 90% of the components needed to produce a chip for example, it just needs the Know-how and to set up dedicated companies.
WEF controlled EU countries have far less resources than Russia even if the totalitarian EU becomes a unitary state which, judging from latest differences, looks increasingly like a globalist utopia.
Moscow has all the cards to be on par with the US but two other pillars of this process are population growth (Russia needs 200 mln people at least, current 152 mln are not enough, so support for families must be further enhanced) and it must fully reject the climate change fanaticism.
So what about empire? That’s obviously needed in a situation where adding new territories can compensate the losses caused by reduction of exports, because otherwise Russia doesn’t need more territory normally as it is already huge, it becomes important when facing an existential threat like NATO which must be pushed as far away as possible from the Russian border and as a form of compensation, when you gain a new territory you also gain all its resources which then become automatically unavailable to the enemy, in this optics the Ukrainian wheat fields must be all liberated and become full-fledged Russian territory.
So the new “Russian empire” must include 80% of what’s left of the Ukraine, Moldova and Belarus in the West, must expell NATO from the Caucasus and the Black Sea, needs to be the centre of a new union with all of the Central Asian states, a sort of Eurasian Economic Union + CSTO on steroids.
With the above points in mind, here are the twelve (broad) considerations (plus three bonus ones) for emerging market investors when looking at countries (or regions) to invest in:
- Globalization & trade (as in interconnectivity and dependence on other countries)
- Level of sovereignty (e.g. ability to be independent, non-aligned, or neutral)
- Domestic oil and gas resources (as fossil fuels are not going away any time soon)
- Alternative energy resources (as in uranium and plutonium and, to a lesser extent, lithium)
- Fresh water reserves (especially for agriculture, electricity generation, and certain types of manufacturing like semiconductors)
- Industrial mineral (e.g. iron, aluminum, titanium, etc) plus rare earth mineral resources (for electronics etc)
- Gold and silver resources or reserves (aka real money)
- Industrial / manufacturing / commodity vs. finance / debt / consumer driven economy (aka “real” or “hard” vs. “fake” or a heavily financialized-debt driven economy)
- Domestic agriculture (e.g. corn, wheat, soy, palm oil, etc)
- Intellectual capital (e.g. scientists, technologists, etc)
- Demographics (as in the size of the population, age, and growth rates)
- Level of climate change / ESG / “sustainability” practicality vs. fanaticism (e.g. the EU)
The following three bonus country considerations need to be kept in mind as they often play an outsized role impacting my considerations #1 to #12:
- Corruption / corporate governance / regulatory environment (or perceptions of…)
- Political certainty (or perceptions of…)
- Elite & development bargains
As for #13, the level of corruption, corporate governance and regulatory environment in any given country will get based on our own perceptions or biases (and do not forget about the influence of the Western media, supernational organizations, or consulting firms on those biases). Country corruption and corporate governance can be summed up best by the following remark that I once heard a businessman make during the Q&A portion of a Chamber of Commerce event in Manila:
“I’ve done business all over the region. There’s no more or less corruption here [in the Philippines] or anywhere else. There’s just different forms of it…”
[NOTE: The same can be said with regulatory environments e.g. it might be far easier and faster to get infrastructure projects approved and built in Africa than, say, a house built in San Francisco – 1,000 days on average for entitlements and permitting alone!]
A paragraph in Joe Studwell’s Asian Godfathers: Money and Power in Hong Kong and Southeast Asia, also has this interesting take on corruption Southeast Asian vs. African style:
Mostly, however, directorships, free or underpriced share distributions and straightforward hand-outs are just a cost of business. Businessmen need political favour and those with power expect to be rewarded for their own investment in political entrepreneurship. As one of Badawi’s political secretaries observes of the system in Malaysia: ‘The template is corruption.’30 None the less, while the south-east Asian system is corrupt, it is more efficient than ones that pertain in societies where holders of power also seek to be exploiters of business rents. South-east Asia is not comparable with the kleptocracries that have ruined many African countries. In most cases south-east Asian politicians sell public resources and economic rights to private businessmen and do not interfere in the running of the businesses. When Asian despots do behave more like African kleptocrats – as with the increasingly uncontrolled indulgence of Suharto’s children in the last decade of his rule – the results are more similar.
As for #14, we have certainty that democratic countries like Brazil and India will have elections (which might be seriously flawed or marred by fraud) every so many years. And while their Prime Ministers or Presidents will change every so often, there are enough checks and balances (or gridlock) in their political systems to ensure little else (like economic policy) will radically change.
However, we are in the dark about near-term policy changes (like zero-COVID) in non-democratic countries with opaque decision making and leadership selection processes. And we have no clue what might happen in a post-Putin Russia, post-Xi China, or post-MBS Saudi Arabia.
As for #15, the Bretton Goods Substack has an excellent book review of Gambling on Development: Why Some Countries Win and Others Lose. The book’s premise:Economic development depends on deals within a country’s elite – so-called elite or development bargains. When the elites decide to have pro-growth policies, they take a personal risk. Most elites do not want to take risks as they prefer to enjoy the spoils of corruption instead.
Determining what sort of elite or development bargains could be in place within an emerging market country might be hard to figure out for those outside the elite. But like a Supreme Court Justice once said about porn: “I know it when I see it” e.g. look at many Central American or African countries vs. the so-called Asian Tigers. You know it when you see it…
It argues that there are three critical interventions that governments can use to speed up economic development. Where these interventions have been employed most effectively in east Asia – in Japan, South Korea, Taiwan and now China – they have produced the quickest progressions from poverty to wealth that the world has seen. When, by contrast, other east Asian states have set off with the same ambitions and equal or better endowments, but have not followed the same policies, they have achieved fast growth for a period but the progress has proved to be unsustainable.
The first intervention – and the most overlooked – is to maximise output from agriculture, which employs the vast majority of people in poor countries. Successful east Asian states have shown that the way to do this is to restructure agriculture as highly labour-intensive household farming – a slightly larger-scale form of gardening. This makes use of all available labour in a poor economy and pushes up yields and output to the highest possible levels, albeit on the basis of tiny gains per person employed. The overall result is an initial productive surplus that primes demand for goods and services.
The second intervention – in many respects, a second ‘stage’ – is to direct investment and entrepreneurs towards manufacturing. This is because manufacturing industry makes the most effective use of the limited productive skills of the workforce of a developing economy, as workers begin to migrate out of agriculture. Relatively unskilled labourers create value in factories by working with machines that can be easily purchased on the world market. In addition, in east Asia successful governments pioneered new ways to promote accelerated technological upgrading in manufacturing through subsidies that were conditioned on export performance. This combination of subsidy and what I call ‘export discipline’ took the pace of industrialisation to a level never before seen.
Finally, interventions in the financial sector to focus capital on intensive, small-scale agriculture and on manufacturing development provide the third key to accelerated economic transformation. The state’s role is to keep money targeted at a development strategy that produces the fastest possible technological learning, and hence the promise of high future profits, rather than on short-term returns and individual consumption. This tends to pit the state against many businessmen, and also against consumers, who have shorter strategic horizons.
With the above considerations in mind, let’s look at where key emerging and frontier markets or regions fall:
Except for considerations #2, #8 (but there are debt problems of an unknown scale), #10, and #12, China is in a difficult position on my other points. However, they are heavily investing in the Belt and Road Initiative (BRI) for better connectivity with Russia, Central Asia, and SE Asia as these regions have much of the natural resources they lack and (to some degree) better demographics.
China’s current export-orientated rather than inward-consumer driven economy also means any breakdown in globalization and trade (e.g. due to conflicts with the US etc.) will hit the country hard.
Japan, South Korea and Taiwan
While strong on intellectual capital with a firm industrial base, China’s three neighbours generally lack natural resources and (like China) face demographic challenges. They are also export orientated and are firmly (for now) part of the US-led Western bloc – meaning considerations #1, #2, and (potentially) #12 have negative implications for these countries.
As the world’s largest Muslim country and rich in natural resources, Indonesia ranks highly on my twelve criteria. With that said, Indonesia is often (rightly or wrongly) the subject of negative perceptions (courtesy of Western and Australian media in particular) for all my bonus considerations.
Consideration #2 is worth discussing in more detail due to Indonesia’s historical involvement in the Non-Aligned Movement. Bandung is home to the Asian-African Conference Museum (which I visited in 2013).
The so-called Bandung Conference was organized in 1955 by Indonesia, Burma (Myanmar), India, Sri Lanka, and Pakistan. Although long forgotten in the West, the conference was an early step towards the eventual creation of the Non-Aligned Movement that persisted throughout the Cold War.
Indonesia has continued to show an independence streak e.g. the United States recently had to cancel a trip by their special envoy on LGBTQ rights after the country objected to the visit (the envoy still went to the Philippines and Vietnam). Indonesia has also remained neutral in the Ukraine conflict, and Russia (but not Putin himself) recently attended the G-20 Summit in Bali.
Malaysia is rich in natural resources with an agricultural (palm oil exports) and industrial-manufacturing base (e.g. part of the electronic supply chain, Halal food production & export, etc.) along with a history of maintaining an independent and pragmatic foreign policy. On the other hand, the country has a relatively small population and has long suffered a brain drain – making it dependent on guest workers.
However, all three of my bonus considerations are serious problems as Malaysia’s politics and elites revolve around, and are intertwined with, race and religion (the Murray Hunter Substack does a great job covering this). And it remains to be seen if the 10th Prime Minister Anwar Ibrahim (the 5th Prime Minister in five years) can overcome and make progress on solving these challenges.
Like Malaysia, the Philippines is rich in natural resources and agricultural potential; but with much better demographics (albeit with a serious brain drain). However, the Philippines’ economy has traditionally been narrow-dominated or fuelled by electronics-semiconductors, remittances, and increasingly outsourcing.
However, all three of my bonus considerations need to be considered when examining the Philippines – especially my last one (so-called “elite” or “development bargains”). Often corrupt business and political dynasties (e.g. see my Thoughts for Investors: Bongbong Marcos Wins the 2022 Philippines Elections in a Landslide) have long dominated the country and (together with a complicated colonial history) continues to cast a long shadow. To better understand that, James Fallows’ controversial 1987 essay (A Damaged Culture: A New Philippines?) is well worth reading by investors. Studwell’s Asian Godfathers also has this to say:
In south-east Asia, political élites avoided land reform. The most egregious case is the Philippines, which, as has been noted, boasts the most selfish and self-serving political class, based heavily in landed wealth.
Then there is my consideration #2. After the United States forced the Spanish out, occupying the Philippines led to conflict with the rising Japanese Empire. Today, the Philippines is potentially in a similar situation – only it’s stuck in the middle of the growing conflict between the USA and China. That’s not a good position to be in for the country as Filipino author Francisco Sionil José once wrote:
We are poor because our elites from way back had no sense of nation–they collaborated with whoever ruled–the Spaniards, the Japanese, the Americans and in recent times, Marcos. Our elites imbibed the values of the colonizer.
To understand why Singapore has been so successful, you could start by reading some of Lee Kuan Yew’s books, such as From Third World to First: The Singapore Story: 1965-2000. However, a far more informative read is Studwell’s Asian Godfathersand these two paragraphs from the book:
The regional offshore roles of Hong Kong and Singapore have been absolute constants since their founding, and show no sign of change. In the aftermath of the Asian financial crisis Michael Chambers, head of research in Indonesia for Credit Lyonnais Securities Asia (CLSA), estimated – based on information from banking sources – that some US$200 billion of Indonesian capital was sitting in Singaporean banks.58 That compared with an Indonesian GDP of US$350 billion. Some money in city state banks is legitimate expatriated capital and some is ill-gotten gains; Hong Kong and Singapore show little interest in separating the two. Indeed, in recent years, as the European Union finally brought pressure to bear on Switzerland and other European private banking centres to block tax evasion and introduce withholding tax for some non-nationals, Singapore moved to fill a global – as well as its regional – niche. The city increased account secrecy provisions and changed trust laws in a manner designed to attract the kind of money Switzerland had dealt in; the number of foreign private banks in Singapore almost doubled between 2000 and 2006.59 After Singapore hosted an IMF conference in September 2006, there was a rare and highly entertaining insight into how some – normally reticent – investment bankers really view the island state. Exasperated by the ‘nauseating pleasantries’ of the conference and a dinner with prime minister Lee Hsien Loong at which foreigners ‘fawned [over] him like a prince’, Morgan Stanley’s chief economist in Asia, Andy Xie, fired off a missive to colleagues. People at the meeting, he said, ‘were competing with each other to praise Singapore as the success story of globalization … Actually, Singapore’s success came mostly from being the money laundering centre for corrupt Indonesian businessmen and government officials … To sustain its economy, Singapore is building casinos to attract corruption money from China.’ When the email was leaked, a flustered Morgan Stanley spokeswoman said its content was ‘aimed at stimulating internal debate’ in the firm; Mr Xie resigned. 60 [The incident was widely report, including by Netty Ismail, Bloomberg, 5 October 2006.]
Together with banking services in Hong Kong and Singapore go real estate, shopping and entertainment. The luxury housing markets of the city states have always been driven by outsiders – today it is mainland Chinese in Hong Kong; in Singapore it has always been Indonesians. The Hong Kong or Singapore bolthole has been a source of security and a reliable investment for tycoons from Thailand, Malaysia, Indonesia and the Philippines, whether in the nineteenth century or today. After the Asian financial crisis and anti-Chinese riots in Indonesia, the early Monday morning and Friday afternoon flights between Singapore and Jakarta became a tycoon express as ethnic Chinese Indonesia tycoons shuttled back and forth. They moved their families out of their Jakarta homes and into their Singapore ones. Hong Kong and Singapore also have long been the regional centres for luxury shops and fine cuisine, while Hong Kong has its horseracing and the nearby gambling and money laundering fleshpot that is Macau. Though many people expressed surprise, it was not one in terms of historical continuity when the authoritarian regime in Singapore decided in 2005 that it would license two huge casino resorts. The post-independence Singapore of Lee Kuan Yew and family has only evinced moral fervour when it does not interfere with the business of a city state. Hence the contrast between banking secrecy and long-tolerated prostitution – which largely serves visiting businessmen – on the one hand, and Singapore’s fines for not flushing urinals or failing to shut the curtains while in a state of undress on the other. Prime Minister Lee Hsien Loong greeted the legalisation of gambling with the rhetorical question: ‘If we don’t change, where will we be in twenty years?’ But in reality Singapore’s casinos are just the latest chapter in its remaining the same.
As a small city-state or entrepot lacking natural resources, any breakdown in globalization, international trade, or financial flows (the sort Studwell’s book delves into) will impact Singapore. Nevertheless, the country still has a diverse economy focused on value-added activities in the manufacturing and services sectors – not just finance and banking. Singapore has also avoided taking sides in the growing China and USA-Taiwan conflict – making it an attractive destination for wealthy Mainland Chinese (e.g. Covid-weary Chinese millionaires eye Singapore amid ‘chaos and unpredictability’ at home).
Most “Singapore” stocks would be companies with regionwide (e.g. Indonesia, Vietnam, etc) or global operations. And they choose to incorporate or have their headquarters in Singapore given the stable legal, political, and financial environment – something neighbouring countries have often historically lacked.
For better or worst, Thailand has a diverse economy (natural resources, agriculture, manufacturing, and tourism) deeply tied to globalization (e.g. part of the electronics and automotive supply chains). However, repeated flooding in recent years and the COVID pandemic have shown the economy (and supply chains) to potentially be vulnerable – either from natural disasters or disruptions in globalization.
Then there is my consideration #2. In November 2014, Thailand and China signed an MOU agreeing to construct the Thai portion of an HSR railway from Kunming, China, to the Gulf of Thailand. Thus, Thailand will become an important Southeast Asia connection for China’s Belt and Road Initiative – something that benefits Thailand but has not gone over well with a particular Western government.
This leads to my considerations #14 and #15. Thailand observers were once concerned about what would happen after King Bhumibol died. And then there are the on and off by protests that have rocked the country over the past decade.
However, Thailand is controlled (behind the scenes) by the military and a small (but powerful) business or royal elite whose interests intertwine (a classic “elite” bargain). They are not going anywhere – no matter who might be (secretly…) funding or supporting any attempts to spark so-called “color revolutions.”
Vietnam ETFs Lists.
In addition to good demographics (compared with North Asia) and intellectual capital, Vietnam is rich in natural resources. The country is also largely self-sufficient in oil now (helping to keep inflation in check), is a major food exporter, has a strong industrial base, and has plenty of coal to power its industries.
However, the Vietnamese economy is export-dependent, while historical animosities toward China could push the country towards the western bloc (rather than towards non-alignment). Then there is consideration #12 and a recent Zero Hedge article that noted: G-7 Offers $15 Billion To Vietnam, Up From $2 Billion, To Transition To Renewables Months After Country Snubbed Climate Ambassadors. It’s unlikely Vietnam can be intimidated (or shamed!) into (Western-EU level) climate fanaticism, but its also unclear whether the country (or it’s leaders) can get bribed into risking power shortages by moving away from fossil fuels to quickly.
This leads me to Consideration #13 (corruption). Anyone who has worked or done business in Vietnam knows this is the elephant in the room. But this post is not about working or doing or starting a business in the country. Vietnam’s government is also determined for the country to get upgraded from frontier to emerging market status, and they have gotten more aggressive at curtailing stock market manipulation and corruption (See: Digging Deeper: Vietnam’s Stock Market Reforms and Frontier Market Status Update (July 2022))
Compared to China (and its growing dependency on making the expensive Belt and Road Initiative succeed), India seems better positioned for future economic growth thanks to more domestic natural resources (albeit fresh water resources might be getting stretched) – including better access to Middle East oil and Southeast Asian and African resources. Demographics are also much better as its population will not peak for a few more decades.
Unlike China (with its opaque leadership selection processes and questionable economic figures), India is politically settled (via elections) and reasonably transparent on economic numbers.
Then there are my considerations #2 and #12. India’s willingness to ignore Western sanctions and purchase discounted oil from Russia using Rubles is a continuation of their traditionally independent or non-aligned foreign policy. India also seems an unlikely candidate for Western-EU-level climate fanaticism.
Finally, while India has border disputes with China and Pakistan, the growing rift between China and the USA-Taiwan benefits India as Chinese manufacturing increasingly shifts towards South and Southeast Asia.
Other South Asian Countries
Other South Asian countries such as Bangladesh, Nepal, Pakistan, and Sri Lanka are all potentially interesting frontier markets. However, there limited ways for Western investors to gain direct exposure to them.
For better or for worst, Central Asia’s future is closely tied to that of Russia and China (aka the Belt and Road Initiative). However, the region as a whole tends to rank positively on my other considerations (except for water: Central Asia’s ’Water Wars” Are Heating Up).
In addition, Central Asian countries have received an influx of talent in the form of young Russians avoiding conscription and being sent to fight in Ukraine. Many of these Russians will stay in the region to start businesses and contribute to local economies (as unlike in the EU, they will receive little in the way of welfare benefits if they don’t work).
For western investors though, there are limited Central Asia focused ETFs (Central Asia ETFs list), ADRs (Kazakhstan ADRs list) trading on major stock exchanges, and active funds (e.g. Asia Frontier Capital Ltd. offers the AFC Uzbekistan Fund). Nevertheless, the region could also offer western investors a backdoor way to invest in Russia (e.g Investors Trapped in Russian Bonds Find Buyers in Kazakhstan).
Eastern or Emerging Europe
Czech Republic ADRs, Hungary ADRs, Poland ADRs, Russia ADRs, Ukraine ADRs, Emerging Europe ADRs, Cyprus ADRs, Greece ADRs, Eastern Europe Closed-End Funds, Russia Closed-End Funds, Eastern Europe ETFs (Region Wide), Poland ETFs, Russia ETFs, Emerging Europe ETFs, Emerging Europe ETFs (Region Wide), and Greece ETFs Lists.
Except perhaps for intellectual capital, Eastern and emerging Europe tend to fair poorly on most of my natural resources and sovereignty considerations.
While Central Asian countries get concrete returns from their proximity to Russia (cheap energy) and China (Belt and Road Initiative infrastructure) and are free to exploit a wealth of natural resources, Eastern and emerging Europe get few benefits (and have many restraints) from being shackled to the EU and USA. Funding from Brussels usually has (many political) strings attached, while EU climate fanaticism and sanctions on Russian energy will cripple economic growth.
And unlike the Russians moving to Central Asia, Ukrainian refugees will find few opportunities to start businesses or find jobs in the EU. And the burden from these refugees will be heavily borne by Eastern and emerging Europe countries closest to the conflict.
The Gulf States of Bahrain, Kuwait, Qatar, and the United Arab Emirates (UAE) are an interesting collection of countries or entrepots. Primarily rich in oil or natural gas, all four are under the shadow of Saudi Arabia (and, to a lesser extent, the USA) due to Sunni Islam (however, Bahrain is majority Shiite, but ruled by a Sunni royal family). And all have made efforts to diversify their economies and bring in intellectual capital (in the form of expats and guest workers).
Dubai (one of seven emirates that make up the UAE), in particular, provides the Middle East, Africa, South Asia, and even Russia and Central Asia with the same sort of financial “functions” (outlined in Asian Godfathers) that Singapore has long provided SE Asia. Joe Studwell’s How Asia Works gives a good description of how these sorts of places operate:
Offshore centres are not normal states. Around the world, they compete by specialising in trade and financial services while enjoying lower structural overheads than other countries, which have larger, more dispersed populations, and agricultural sectors that drag on productivity.9 Offshore centres’ lower overheads mean that they also have a built-in fiscal advantage. Yet they can never exist in isolation – they are in a strict sense parasitic, because they have to have their host or hosts to feed on.
In other words (as with Singapore), companies based in the Gulf States tend to offer exposure to the whole region.
Although Israel has limited natural resources, the country is largely self-sufficient in agriculture and has a diversified economy with some of the best intellectual capital in the world. After China, Israel also has the most NASDAQ-listed companies – many of which are tech, health care, or biotech-pharmaceutical companies.
However, globalization also means Israel and Israeli companies remain vulnerable to the Palestinian-led Boycott, Divestment and Sanctions (BDS) movement (e.g. consumer home carbonation product maker SodaStream International Ltd, now a PepsiCo subsidiary, had the eighth largest NASDAQ IPO for an Israeli company; but got repeatedly embroiled in BDS related controversies). In fact, many listed Israeli companies are discreet about their ties to Israel (e.g. they set up their HQs abroad in the USA).
And close ties to the USA, a large Russian Jewish population, and entanglements in Syria (where Iran, Russia, and Turkey are also involved) can complicate Israel’s ability to remain non-aligned in global conflicts involving Russia or China. On the other hand, the country’s efforts to normalize or improve relations with the Gulf States and Saudi Arabia appear to be bearing fruit.
The original petrostate, Saudi Arabia largely lacks most other natural resources and remains dependent on imported intellectual capital. The relatively young Crown Prince Mohammed bin Salman (MBS) has ambitious plans to diversify the economy and transform the country. And therein lies the problem (along with my bonus considerations #13 to #15).
For example, MBS plans to create Neom, a $500 billion economic zone intended to attract investment in sectors such as renewable energy, biotechnology (including genetically modified agriculture), robotics, and advanced manufacturing. The project includes The Line – a 170-kilometer-long (110 miles) linear smart city that critics liken to a dystopian nightmare:
Such ambitious projects have the potential to either transform Saudi Arabia or become expensive boondoggles (as MBS ultimately has the final say and may not take kindly to criticism of any pet projects).
With that said, Saudi Arabia (under MBS) is increasingly asserting its independence from the US foreign policy and placing its future with the BRICs – a positive for economic growth and development.
Turkey has an industrialized economy, a diversified natural resource base, good demographics, and a strategic trading location straddling Asia and Europe. And like Saudi Arabia, the country is increasingly pursuing an independent foreign policy and a future with the BRICs.
However, NATO member Turkey is also embroiled in geopolitical conflicts to the south (with the Kurds in Syria and Iraq) and indirectly with the Russia-Ukraine war. And relations with the EU, and increasingly with the USA, have gotten frosty.
In addition, Turkey under Erdoğan and Erdoğanism has produced (at best) mixed political and economic results. For example, unorthodox ideas about interest rates, current account deficits, and large amounts of private foreign-currency-denominated debt have led to currency devaluations, high inflation, and a debt crisis. On the other hand, the Turkish stock market soared to a record high in 2022 (for its best performance since 1999) as domestic retail investors sought a refuge from runaway inflation.
The 2023 Turkish general election is scheduled for June 18, 2023, with Erdoğan already a declared candidate. However, Turkish politics are unpredictable, and the country may be in for more political and economic volatility.
Egypt is one of Africa’s largest economies, the most populous Arab county in the world, and has good demographics. But while the country’s stock exchanges were very active in the 1940s (when the combined Egyptian stock exchange ranked fifth in the world), they largely went dormant from the 1960s (when Egypt adopted socialist central planning policies) until the 1990s (when reform began).
Today, Egypt’s 2030 Vision aims to diversify the economy. However, the country offers limited (direct) investment options for Western investors (London, European, or Dubai stock exchanges may have more listings with Egypt exposure).
Nigeria ETFs Lists.
Sometimes referred to as the Giant of Africa, Nigeria is a potentially interesting frontier market for investors to keep on their radar. However, it’s worth reading some of what Gambling on Development (which has a chapter about the country) has to say:
Actually, the most basic economic figures don’t look that bad. Nigeria is a middle-income country, still richer than, say, Kenya, with almost double that country’s GDP per capita.2 Over the last two decades, Nigeria’s economy has grown at quite decent rates, by almost 3 per cent a year per person. By 2013, it had become the largest economy in Africa, overtaking South Africa after it recalculated its GDP using more up-to-date methods and a little encouragement (the head of the National Bureau of Statistics probably did not understand my slight smile when he told me in 2013 that the only instruction the president had given him was to ensure that the recalculated GDP was larger than South Africa’s). Even so, this has been a middle-income country for a while, and it has experienced solid growth in recent times.
Nigeria is not just a country characterised by both extreme wealth and the deepest abject poverty. It also has pockets of innovative entrepreneurship, of the highest intellectual sophistication, of bureaucratic excellence, and of inspiring artists and writers such as Chinua Achebe and Wole Soyinka. At times, it is vibrant with unbridled optimism. But it is also home to some of the worst forms of patronage, rent-seeking economic behaviour, absurd economic policies, ethnic political competition, poor or at times predatory and corrupt public administration, violence and conflict, and, too often, little hope.
For investors, its also worth noting what the Fundsmith Emerging Equities Trust plc-Half Year Report for the six months ended 30 June 2022 (also see my piece, When Emerging Market Growth Stock Investing Fails: Fundsmith Emerging Equities Trust plc to Liquidate) had to say about the country:
Nigeria, in our opinion, remains very much a curate’s egg for investors – ticking all the demographic boxes (the country’s population is forecast to double to 400m by 2050) but consistently underperforming in policy implementation.
In other words, Nigeria is an African version of India (albeit politically and economically, the former is probably where the latter was several decades ago). American investors, though, will probably need to look at stocks or funds listed on the London, European, Dubai, or South African stock exchanges for exposure to Nigeria.
Rich in natural resources, South Africa has the most advanced and diversified economy in Africa. However, so did Zimbabwe at one time. Like their neighbor to the north, South Africa’s problems revolve around my bonus considerations which tie back into my first considerations.
For example, South African President Ramaphosa’s “farmgate” scandal is centered on “donations” involving regimes or individuals based in multiple countries – including Saudi Arabia, Qatar, and Equatorial Guinea. He allegedly received about $10 million from Equatorial Guinea’s Teodorin Nguema Obiang Mangue to facilitate the return of his assets confiscated in France and to “convince” the courts in South Africa to rule in his favor. He also allegedly received “donations” from Saudi Arabia to not give any form of support to Qatar over some disputed territories (along with an exclusive oil deal).
If a South Africa President can get bribed over such trivial matters, what about my considerations #2 (sovereignty) and #12 (climate practicality vs. fanaticism)? For example, South Africa suffers blackouts due to mismanagement and poor maintenance at state-owned power supplier Eskom – meaning the country is not in a position to pursue climate fanaticism policies. And yet, there are these recent headlines: Biden Wants $8 Billion In Taxpayer Funds To Shut Down Coal Power In South Africaand South Africa Hits 200 Days of Power Outages Amid Holiday Season.
On a positive note, many South African companies would have operations in other African countries – offering investors diversification and exposure to the rest of the continent.
Other African Countries
Many African countries are rich in natural resources and have good demographics (albeit with a brain drain of their limited intellectual capital). However (and as with South Africa), their weaknesses revolve around my bonus considerations which the book Gambling on Development delves into in considerable detail.
And then there is my consideration #2 (sovereignty). After being fought over by European powers and then the Cold War superpowers, many African countries find themselves in the middle of global conflicts between the former colonial powers, the USA, Russia, and China. Picking the “wrong” side could have repercussions – as the following tweet sarcastically notes:
Then there is this meme:
Sarcasm aside and for Western investors, there would only be (at the most) a few hundred African stocks, ETFs, and other funds accessible (via USA, London, European, Middle East, or South African stock exchanges) for direct investment exposure to Africa. And for better or for worst, many might have exposure to multiple countries.
Argentina is a classic cautionary tale for emerging market investors and investors in Latin America. Rich and largely self-sufficient in natural resources (especially agriculture) and intellectual capital along with a diversified economy, but a near hopeless basket case politically and economically (e.g. repeated debt defaults and currency devaluations or other crisis every decade) for nearly a century.
President Cristina Fernández de Kirchner’s 2012 partial renationalization of YPF (the nation’s largest energy firm) did little to change international perceptions about Argentina’s (increasingly) toxic politics and its ability to get its economic act together.
Brazil has long been referred to as “the country of the future” for good reasons. The country is rich in natural resources, has strong demographics, good intellectual capital, and has a diversified economy (agriculture, natural resources, manufacturing, and services).
However and once again, my bonus considerations #13 to #15 come into play starting with the recent elections:
Brazil’s Presidential elections are effectively under the complete control of a Supreme Court Justice and Lula appointee and supporter (who did everything he could to tip the election scales in one direction).
However, Article 142 of the 1988 Brazilian constitution allows the military to audit election irregularities and intervene in conflicts that disrupt Brazilian society. If the Brazilian military fails to intervene (at some point), Lula has (apparently) signaled his intentions of gutting the military’s top brass – something that Venezuela’s Hugo Chávez did around 2000. In other words, Brazil could quickly head down the same path Venezuela did.
If that sounds alarmist, investors need to remember that Lula’s first Presidency was marred by numerous corruption scandals that ultimately led to Operation Car Wash (and Lula getting sent to prison). Originally a money laundering investigation, it expanded to cover allegations of corruption at Petrobras (NYSE: PBR), where executives allegedly accepted bribes in return for awarding contracts to construction firms at inflated prices. After Brazilian construction company Odebrecht was deeply implicated, at least eleven other (mostly Latin America) countries became involved (along with many other companies).
Nevertheless, investors should take some comfort in what the Wall Street Journal recently had to say (Conservatism Grows in Brazil, Despite Leftist President’s Win):
Come Jan. 1, about 65% of senators who will take office will either be allied to Mr. Bolsonaro or not in opposition to him—“a markedly more conservative” senate, according to an analysis by Congress in Focus, a congressional monitoring group.
In the lower house of Congress, 36% of federal deputies who will take office have expressed support for Mr. Bolsonaro, while only 24% have backed Mr. da Silva, according to the group. “The lower house has a strengthened rightwing…and a weakening of Brazil’s most traditional political parties,” Congress in Focus said in the analysis.
Brazil’s farming belt is at the heart of the political shift in this nation of 215 million people, a transformation made possible in large part because of China’s demand for grains and meat.
Among the top 50 financiers of Mr. Bolsonaro’s election campaign last month, about two thirds made their money in agribusiness and at least one in five are based here in Mato Grosso, according to electoral court data.
Blessed with natural resources and agriculture (albeit lacking a large population), Chile has an open and liberalized economy (thanks to the 1973-1990 Pinochet dictatorship) – long making the country a bright spot for Latin American investors. However, much of Chile’s export-orientated economy is tied to (or impacted by) copper (and other commodity) prices. This also means the country is susceptible to trade and globalization disruptions.
And as with Argentina, Chile could become another cautionary tale for emerging markets and Latin American investors as the country has steadily slid backward toward leftist statism. As with the rest of Latin America, income inequality and entrenched wealthy elites have fueled resentment in Chile.
However, a 2022 attempt to replace the Pinochet era constitution with a new (radically leftist) one got soundly defeated at the polls. Nevertheless, Chilean leftists have vowed to keep trying (and therein lies the problem for investors).
Long mired in Civil War, Colombia’s economy has enjoyed a “peace dividend” in recent years as internal conflicts subsided. The country is rich in natural resources (including coal and oil for export and water for hydropower) and is able to grow a wide variety of agricultural crops for export. With an estimated 50 million people in 2020, Colombia is also the third-most populous country in Latin America (after Brazil and Mexico).
However, the election of Colombia’s first leftist president, Gustavo Petro, casts a shadow as the country increasingly lurches towards climate fanaticism.
Petro hopes to move the country away from extractive industries like mining and oil in favor of agriculture and renewable energies, among other sectors. He has also promised to ban new oil projects (oil accounts for nearly half of all exports and nearly 10% of national income) for environmental reasons (though he has promised to respect current contracts).
Mexico has a diverse industrialized economy with well-developed agricultural export and services sectors. The country also has oil (but is not a member of OPEC), is the largest producer of silver in the world, and is a top global producer of gold, copper, zinc, and other minerals.
However and when Mexico’s leftist President Andrés Manuel López Obrador (“AMLO”) assumed office in 2018, he ordered a stop to the granting of mining concessions. This has started to hit the Mexican mining sector hard.
As for my consideration #2, 19th and early 20th-century Mexican dictator Porfirio Diaz reportedly lamented: “Poor Mexico, so far from God, and so close to the United States.” Mexico has benefited tremendously from its proximity to the USA and NAFTA’s hallowing out of the American manufacturing sector. The country is also poised to benefit as supply chains shift away from China as Chinese companies recognize the benefit of setting up operations in a country with low wages and NATFA benefits.
However, a recent International Business Times article (Energy Politics Cloud Mexican Bid To Join US Semiconductor Rush) noted:
His [Obrador] pursuit of “energy sovereignty” by helping utility Comision Federal de Electricidad and state oil firm Petroleos Mexicanos while limiting privately-funded renewable output has flummoxed manufacturers trying to lower their carbon footprint.
In Jalisco, national energy policy has put on hold seven private renewable power projects – five solar and two wind – encompassing $1.1 billion in total investment, according to figures from the state’s energy agency.
Businesses are taking note, especially in carmaking.
Julian Eaves at CW Bearing, a Chinese-owned automotive supplier in central Mexico, said firms want to leverage the country’s location and competitive labor costs.
But winning new business depends on firms showing customers how they will lower global emissions — a goal government policies are hindering, he said.
In other words, and despite being a leftist, AMLO has bucked climate fanaticism.
However, Mexico’s next General elections are scheduled for July 2024. AMLO (who cannot run for President again) has pushed through a controversial electoral reform bill that critics claim will undermine electoral independence.
Peru is rich in natural resources and has a strong agriculture export sector with some manufacturing and services mixed in. In other words, the country has a reasonably diversified and open economy (like Chile) with solid economic fundamentals (albeit with exposure to export markets).
However, Peru has long been beset by political instability (which the markets have historically shrugged off). The recent removal of the country’s leftist president after he attempted to overthrow Congress appears to be a continuation of this long-term political instability.
Asset Allocation Implications
First, here are some general rules of thumb when it comes to passive (ETF) investing in emerging markets:
- If the big asset management players, index providers, or corporate media (rightly or wrongly) favor a particular country, passive investment strategies have a good chance of succeeding (after all, a rising tide lifts all boats or all investments).
- If the opposite is the case, then a country’s fundamentals won’t matter much. Active funds and targeted individual stock selection will likely outperform their passive counterparts.
- Rightly or wrongly, index providers are the gate keepers. It matters (as in billions of dollars worth of potential investment flows) whether or not they classify a country as an emerging or a frontier market.
- ETFs (especially for countries with small or illiquid stock markets or frontier market classifications) can be flawed or poorly constructed. On the other hand, they may be the most efficient way to gain exposure to a particular country (See: VanEck Vietnam ETF (VNM): Flawed But Still an Easy Way to Cash in on Vietnam’s Frontier to Emerging Market Upgrade).
With that in mind, here are some countries or regions where you might want to target your emerging marketing investing:
- Passive Funds (as in ETFs), Active Funds, and Targeted Individual Stock and Bond Selection [NOTE: Some of these countries have limited ETF offerings that may be flawed or poorly constructed]
- Entrepots (e.g. Singapore, Gulf States etc)
- Active Funds and Targeted Individual Stock and Bond Selection
- Central Asia
- Saudi Arabia
- South Africa
- Individual Stock and Bond Selection
- Remaining countries or regions
Again, I am not suggesting you should (totally) avoid investing or having exposure to the remaining countries. With enough research and due diligence, you will find good individual stocks, bonds, and active or maybe even passive funds (focused on or exposed to) the remaining countries. Otherwise, you may want to limit your focus or exposure to the countries that rank more favorably on the 1 to 12 plus three bonus considerations.
And if you don’t like the considerations (focused on sovereignty and self-sufficiency) that I have come up with, then you should develop your own criteria or set of considerations. This will help to narrow your country or region focus and make individual investment selection easier.
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Emerging Market Country Selection in a Multipolar World: Twelve Things to Consider was also published on our Substack.
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