“An emerging market is a country where politics matters at least as much as economics to the market.” Ian Bremmer
I have now been working in a front office country manager job for the last three years in Emerging Markets . For a longer period I have served the developed markets working with asset managers, private banks, family offices, insurance companies as well as central banks to what is known as buyside. For that period of time I had the opportunity to interact with an incredible number of senior managers running companies in variety of sectors from exploration to energy generation, oil and gas to construction, finance and aviation. In the different emerging market countries that I worked each and every single one of the companies that I have served there are similarities when it comes the challenges they have when operating in their home countries. Most common themes where challenges are the governance standards, ethics practices as well as well as their willingness to be transparent and talk to the media. As we live in a globalised economy and capital floats relatively freely from one place to another these emerging markets companies compete with their peers from more developed countries to attract capital and investment. In the capitalist system companies chase capital to finance their growth and capital chases opportunities for better returns coinciding with their specific investment agenda. After these experiences, both in developed and emerging markets now I start to understand what are the main challenges institutional investors have when deciding to deploy cash in emerging markets. The top three main challenges my former clients used to describe are the realities that I see today.
Most of my buyside clients used to point out that companies from emerging markets were not entirely transparent. The lack of success planning in management was also an issue that was often highlighted by many of my clients. Financial statements that do not correspond to the highest international auditing standards was something that I often heard about and also witnessed. Not being able to offer enough transparency and explain what is going on when the business does well or unwell is also a challenge in many instances. Unwillingness of management to speak to local and international media, without their own agenda being followed is also an issue highlighted by many institutional investors. These are only some of the challenges international investors have when they are considering to invest in local markets. Although most of the companies in Emerging Markets produce better returns than their more developed peers and offer higher opportunities for capital appreciation if transparency is lacking most international investors cannot deploy capital to these companies. Lack of transparency contradicts their risk tolerance and their investment practices oblige them to be extremely conscious and open when deploying their own investors money. As a simple example of a company where transparency can be improved hen you go and visit the webpage of Al Rajhi bank, the largest Islamic bank in the world, based our of KSA the last financial report available for download is from 2017.
Many emerging markets companies do not have or fail to implement multi channel communication strategies soft “selling” their business to investors. In some countries many even lack investor relation departments. For others when they exist often they fail to fulfill their function by not creating investor presentations, talking to media or actively employing social media to highlight the unique selling points of their business. For example QEWC , a member of MSCI Emerging Markets index does not have an IR section on their website, the latest corporate governance report available is from 2014 and there is no easily foundable corporate presentation.
Engro from Pakistan, also does not have an Investor relations department, does not have a company presentation, there is no recorded calls with analysts…
Lack of adequate corporate governance practices is something which happens often in emerging markets. In many instances listed companies biggest shareholder is an individual or a family that oversees silently the board. In that instances we do not have the a clear corporate governance policy in place. Family owners or secretive major shareholding companies controlled by the person who created initially the company can easily override or silence the board. In Pakistan for instance most of the listed companies lack reports on their corporate governance policies. As an example we can look at Pakistan Electron.
The last but not the least important challenge when foreign investors decide to deploy cash at work in Emerging markets is political risk. That component is really important. However it is often outside of the control of emerging markets companies as it is dependent on their governments. However, there are strategies that can be devised and implemented even in such circumstances which can re-insure investors that there is contingency planning in place.
As long as there is a will, there is a way. Challenges can be overcomed as soon as there is a strategy and a robust plan is implemented. Companies in Emerging Markets can improve significantly their attractiveness to international investors by creating and implementing investor relation strategies, improving transparency, devising and stritly obeying an ethical governance code of conduct. There some names with which I have worked have significantly improved over a short period of time by realising the issues they have, focusing to improve them and attracting the right talent. A good example is QNB have improved significantly over a short time period. Active social media accounts, great investor relation presentation, active head of IR, openness to communication, improving transparency are good first steps. Like with any article, like, share, comment and let me know what your thoughts are.
Boris Grozev is a seasoned fintech executive. Entrepreneur by heart Boris has helped number of businesses to create and implement business development and product strategies. His advisory work in Emerging and Frontier markets has promoted culture and technology change, fostered innovation and lead to tangible results. He invests in variety of asset classes. Boris is a fast learner, whose leadership abilities, ambition, stamina, passion to succeed and attitude naturally spread to others helping to achieve common goals.