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February 14, 2013

Don’t Underestimate the Importance of Emerging Market Investors

By Spear's

A Developing Story Investors from developed countries no longer have it all their own way in emerging markets the pupils are beginning to teach the masters a thing or two, says Robert Amsterdam

A Developing Story
Investors from developed countries no longer have it all their own way in emerging markets — the pupils are beginning to teach the masters a thing or two, says Robert Amsterdam

IT IS QUITE possible that 2013 will become known as ‘the year of risk,’ following the publication in January of several major reports outlining the rising tide of resource nationalism, state intervention and the gradually shifting balance of power from the Western foreign investor to the emerging market bureaucrat.

However, what is interesting to me is that for all our focus on the opportunities in places like Africa, Latin America and South East Asia, we often underestimate where the business is coming from, and what competition in these markets is actually like.

In recent years we’ve observed an interesting phenomenon of emerging markets investing in other emerging markets, often at advantageous terms with a nimbler approach to opportunities that in some cases leaves more traditional companies out in the wind. The big story used to be China in Africa. Now it’s everybody else in Africa, Asia, and Latin America. And the scramble for opportunities is changing the playing field.

For example, it’s no secret that investors are swooning for Turkey, which enjoyed 8.5 per cent growth last year, preceded by 9 per cent the year before. But less attention is paid to where Turkish companies are going with their new-found capital.

Thanks to a committed mercantilist foreign policy by the Turkish government, a number of businesses are rapidly expanding in Africa. Summa, a family-owned construction and real estate developer, now earns up to 40 per cent of its profits in Africa, working on projects in frontier markets such as Equatorial Guinea, where in just six months it built an impressive 13,000m² convention centre which hosted the African Union summit.

Companies like Summa are supported by their government, which opened nineteen new embassies in Africa in the past three years, while Turkish Airways now services direct flights to 24 African cities.
TURKEY IS HARDLY the only new player in Africa, as dynamic companies from places such as Brazil and India are quickly rushing towards new opportunities. Brazilian bank BTG Pactual launched a $1 billion Africa investment fund last summer, while the government has promoted a new fibre-optic cable to the continent in addition to considerable development loans for projects in Mozambique and Angola. As a result, trade flows between Brazil and Africa have grown to $27.6 billion in 2011 from $4.3 billion in 2002.

Indian companies have rapidly expanded in Africa in oil exploration, mining, manufacturing, telecommunications and services. Jindal Steel & Power, India’s most valuable steel producer, announced planned investments of $2 billion in developing West African iron ore sourcing, while Bharti Airtel, the world’s fifth largest mobile carrier, increased its investments in Africa by 586 per cent in 2011.

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Of course, Africa is not the only destination for emerging capital, as a number of new players have flooded growing markets in Asia such as Indonesia, Cambodia and Vietnam, sometimes originating from within Asia itself.

Twelve years ago, then-prime minister of Thailand Thaksin Shinawatra helped promote the formation of the Mekong-Ganga Cooperation (MGC), consisting of six member countries — India, Thailand, Myanmar, Cambodia, Laos and Vietnam — which led to rapid advances in infrastructure development and deepening regional trade ties. (Disclosure: I serve as legal counsel to Thaksin Shinawatra.) Now Thai companies are aiming as far away as Canada.

Not to leave out the Chinese, who have made remarkable inroads in Latin America, particularly in Venezuela, where a likely upcoming change in government could see Beijing play a role in further developing the largest proven oil reserves on the continent.

It’s no secret that countries that used to be on the receiving end of a foreign policy are developing their own long-term strategies. Richard HK Vietor, author of the book How Countries Compete and a professor at Harvard Business School, has published numerous studies of the national economic strategies of emerging countries, identifying trends that have led to dramatic success.

The US and Europe, however, may be on the wrong track, as fiscal policy has in recent years been directed toward non-competitive aspects of the economy while a heavy tax burden has slowed growth to a crawl.

The result of all these trends is a more intense competition among unfamiliar players under new rules. The next big opportunity will have many new dynamic suitors from the developing world who come to the negotiating table with real political muscle.

The ability of the developed world to react and adapt to this new reality will inform greatly upon how the global economy looks in 50 years. But first, it’s time to take the blinkers off.

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