Investing in Emerging and Frontier Markets: An Investor Viewpoint (World Federation of Exchanges)

International investors can contribute positively to the growth and development of emerging markets. These markets also offer a range of investment opportunities for investors. This research, undertaken with the support of the EBRD, seeks to understand what encourages (or discourages) international investor participation in emerging markets. For this purpose, the WFE interviewed 12 asset owners/ managers with combined emerging market equity assets under management (AUM) of nearly USD 1 trillion. This research builds on prior work of both the WFE and the EBRD. The key findings are summarised below:

• While returns are important for investors, their broader investment strategy will guide how they evaluate returns and how they decide where to invest;

• Investors either exclude (explicitly or implicitly) or invest less in smaller (frontier) markets than in larger emerging markets;

• Few things would prevent investors from investing in a market but lack of certainty about ownership of shares was one of them;

• Some investors said that corporate governance (or lack thereof) was a particular challenge in emerging market investing, as was government interference in business and, in some markets, the length of time it took to open investment accounts;

• All investors were concerned with liquidity, but they measured this in different ways (e.g. at market level versus at individual stock level). Some investors required a minimum liquidity threshold in order to invest;

• Investors by-and-large regarded market infrastructure as a nice-to-have, rather than a prerequisite, with notable exceptions being the existence of a delivery versus payment settlement system and the presence of global custodians (regarded as being very important or critical); and

• All investors (bar one) looked at environmental, social and governance (ESG) factors when evaluating their investments. In some instances, poor ESG performance would prevent investment while in others, investors said they would engage with companies to look for improvement on relevant metrics.

What is clear from the research is that investors have different approaches to emerging market investment and this results in different perspectives on what is important. Overall, however, markets wishing to attract international investors should focus on the following:

• Reducing the direct and indirect costs of investment e.g. the time and effort required to open an investment account, the costs of obtaining information both about the investment process and the companies they are investing in;

• Enhancing the corporate governance of listed firms and their understanding of the relevance of ESG more broadly;

• Investing in market infrastructure enhancements – not as a starting point but to contribute to the improvement of the market over time;

• Developing the local investor base including strong, local asset managers.


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