Emerging and Frontier Markets: Economic and Geopolitical Analysis

[Spectre]

Thank you for your kind words, and I feel the same about your military-related posts--I am here to learn, after all. Please keep up the good work!

Sir are you a finance professional? I am always happy to make acquaintances in my line of work

 

[LeveragedBuyout]

Sir are you a finance professional? I am always happy to make acquaintances in my line of work

Yes. In case you are interested, @Shotgunner51 is an investment banker, I believe @Edison Chen is a commercial banker, and @Armstrong has some role in corporate finance, although I'm a bit vague on that.

 

[Spectre]

Yes. In case you are interested, @Shotgunner51 is an investment banker, I believe @Edison Chen is a commercial banker, and @Armstrong has some role in corporate finance, although I'm a bit vague on that.

Oh! Thanks - I was a fund manager for a few years, taking a sort of sabbatical by working as a consultant.

 

[Edison Chen]

Yes. In case you are interested, @Shotgunner51 is an investment banker, I believe @Edison Chen is a commercial banker, and @Armstrong has some role in corporate finance, although I'm a bit vague on that.

Yes, you still remember it. I work for the planning and treasury office, Beijing. The traditional commercial banking will die unless mixed operation is allowed.

 

[Spectre]

Yes, you still remember it. I work for the planning and treasury office, Beijing. The traditional commercial banking will die unless mixed operation is allowed.

I did my internship at HSBC Treasury long back in London, too much heart - burn

 

[Edison Chen]

I did my internship at HSBC Treasury long back in London, too much heart - burn

Nice experience! So how about HSBC's Treasury office, what do they do usually? I'm curious about that, because HSBC and China's banks are different in many aspects.

 

[Spectre]

Nice experience! So how about HSBC's Treasury office, what do they do usually? I'm curious about that, because HSBC and China's banks are different in many aspects.

I was primary shadowing a trader handling USD/Yen spot & forwards. It was exciting but at the end of day you are burnt - out.

Though most of the dealings were in FX, there was an element of corporate sales involved too in my internship at treasury desk.

-Bloomberg is the best friend
- Lot of time is spent on phone calls/electronically fixing trades. Element of market risk involved though you have floor ceiling atleast in middle management stages. Exciting because you have the authority to make instant decisions
- End of the trading day we usually used to leave office quite early after a conference, Saturdays for MIS.
- Networking was important to keep abreast of market developments.
- I got to experience corporate sales side too, found it not to my liking as I am not very polished in pitching.

 

[Edison Chen]

I was primary shadowing a trader handling USD/Yen spot & forwards. It was exciting but at the end of day you are burnt - out.

Though most of the dealings were in FX, there was an element of corporate sales involved too in my internship at treasury desk.

-Bloomberg is the best friend
- Lot of time is spent on phone calls/electronically fixing trades. Element of market risk involved though you have floor ceiling atleast in middle management stages. Exciting because you have the authority to make instant decisions
- End of the trading day we usually used to leave office quite early after a conference, Saturdays for MIS.
- Networking was important to keep abreast of market developments.
- I got to experience corporate sales side too, found it not to my liking as I am not very polished in pitching.

That's very challenging, FX trade business is in financial market office in my bank, however I have less experience of this position, one has to obtain the required licence for this job, you also need strong customer resources, as you said, the networking is important, since this is a front desk position. In this field, China is far behind foreign banks, since the FX market is highly regulated (for example, in China the annual settlement amount is $50,000 USD annually for each individual), there're many restrictions to invest also. China need traders who have more global experiences, our domestic traders need to grow up.

The planning and treasury office in China is quite different, we're not front desk employees, we do not directly contact customers, our job is internal management, or to adjust internal affairs. We decide interest rate, FX rate(so sad I'm not responsible for this field, LOL) for the whole bank(under the regulation), making plans for F/S management, cash management or liquidity management. We also make, organize, supervise, evaluate the whole business plans, operation and development of the bank. This is not so challenging as financial market office or corporate business office, we also earn less than them, but they have to obey the rules our office made, LOL. I'm considering transferring to do corporate business, which is the core profit growth point of my bank (more than 70% of the profit comes from corporate business, China banks' IB business income is very low).

 

[Spectre]

That's very challenging, FX trade business is in financial market office in my bank, however I have less experience of this position, one has to obtain the required licence for this job, you also need strong customer resources, as you said, the networking is important, since this is a front desk position. In this field, China is far behind foreign banks, since the FX market is highly regulated (for example, in China the annual settlement amount is $50,000 USD annually for each individual), there're many restrictions to invest also. China need traders who have more global experiences, our domestic traders need to grow up.

The planning and treasury office in China is quite different, we're not front desk employees, we do not directly contact customers, our job is internal management, or to adjust internal affairs. We decide interest rate, FX rate(so sad I'm not responsible for this field, LOL) for the whole bank(under the regulation), making plans for F/S management, cash management or liquidity management. We also make, organize, supervise, evaluate the whole business plans, operation and development of the bank. This is not so challenging as financial market office or corporate business office, we also earn less than them, but they have to obey the rules our office made, LOL. I'm considering transferring to do corporate business, which is the core profit growth point of my bank (more than 70% of the profit comes from corporate business, China banks' IB business income is very low).

I get what you are saying about differences in profile and what you explained about treasury role is similar to an extent at HSBC too. I would like to point out since my role was limited to intern I somehow got an experience with more breath and less depth.

FX trades are usually in FM (Financial Markets) division of banks as you have rightly said but treasury also involves itself in trades to manage the overall FX exposure of the bank and my experience was in this side of things. My mentor as I said was managing the HSBC's overall FX exposure. The job finally offered to me was in Financial markets.

A word of advice is that once you are in profit center of any business then remuneration is excellent but so is the pressure to deliver. In banks such pressure of targets can be overbearing at times. This was the primary reason I declined my PPO (Pre Placement offer) at HSBC.

Coporate treasury is another good role, Companies like Apple, P&G, Ford etc are sought after by most traders now days as it is a low pressure job comparatively with high job security. Apple's treasury can be compared to Central Bank of some smaller countries lol China has numerous companies which I am sure can offer comparative roles.

I started my career as an analyst at IB and moved sideways into PE. In PE I had a certain degree of laxity as the fund I was associated with was low risk - low return one. After a while I was comfortable enough financially to move back to India and am since semi retired and have freedom to chose and reject assignments as I please.

 

[Ahmed Jo]

Yes. In case you are interested, @Shotgunner51 is an investment banker, I believe @Edison Chen is a commercial banker, and @Armstrong has some role in corporate finance, although I'm a bit vague on that.

Pshhh.. All of you are nothing compared to a first year Economics/Finance major that's right you heard me..

 

[neolithic]

Strategy in Emerging Economies (19 pages)

 

[neolithic]

The Perils of Managed Trade

 

[Asian.Century]

Emerging vs. frontier markets: Exploring the outer edge of today’s capital markets

Through a simple compare/contrast exercise between emerging and frontier markets, Gustavo Galindo teases out the subtle and stark differences between the two. He illustrates that frontier markets potentially offer bold investors the risks and potential rewards much like emerging markets did for previous pioneers.

September 2015By Gustavo Galindo
By Gustavo Galindo, Senior Portfolio Manager

Investor sentiment toward emerging and frontier markets tends to swing in and out of favor faster than you can say “geopolitical uncertainty.”

Several years ago the BRIC economies (Brazil, Russia, India and China) became the darlings of growth investors drawn to the prospects of a transformative rebirth in those markets. Now, the pullback in China tops the financial pages, and the remaining BRI components are noted more for unsavory risks than promising returns.

Investing on the edge of today’s capital markets is rarely a stress-free experience, but a better understanding of the characteristics of these markets can provide a powerful incentive for investors with the fortitude to bet on their long-term growth.

Defining emerging and frontier markets

We look at two primary components to determine whether markets are emerging or frontier. The first is GDP (gross domestic product) per capita, which is a way to measure a country’s wealth and the affluence of its citizens. The second is how easy or safe it is to access the equity market. Emerging markets have higher GDP and greater accessibility for equity investors than frontier markets.

Even with these clear guidelines, the division between emerging and frontier markets can get blurry. This line has become even blurrier as some previously emerging markets, such as Egypt, have been reclassified as a frontier market, and some formerly developed countries, such as Greece, are now considered emerging markets. Notwithstanding this, some general comments can be made contrasting emerging and frontier markets.

One advantage of investing in frontier markets is that there isn’t the same tradeoff between value and growth that we see in emerging and developed markets. As a result, investors can still find fast-growing companies with attractive valuations that are inexpensive. Investors can buy into those companies and either benefit from the earnings yields or simply wait until the companies are discovered by other investors. These opportunities are a lot harder to find in emerging markets. Still, this unique opportunity comes with a set of unique risks, such as liquidity, inefficiency, and volatility.

A closer look at some of the key differences between emerging and frontier markets will help further illustrate both the pros and cons of investing in the frontiers.

Liquidity

Frontier markets are less liquid than emerging markets. This is a natural offshoot of their being undiscovered. Less trading information is available, and investors have fewer hours during the day to trade. If a market is open for only a few hours a day, it could greatly limit liquidity.

Further complicating matters, liquidity in frontier markets is often difficult to measure because much of the trading occurs in blocks. These blocks of shares are often traded privately and may be sold below or above market value. So, it can be very hard to know the true liquidity of frontier markets’ stocks. This is less of an issue in emerging markets.

Inefficiency

The easiest way to think about inefficiency in emerging and frontier markets is in terms of analyst coverage. In emerging markets, the equity universe is covered by a wide range of analysts. In frontier markets, very few stocks are covered by more than two or three analysts. Consequently, the average investor has less information on which to base their investment decisions. This may create an advantage for those who put in the extra time to get to know the companies.

Moreover, because investors are not always able to access information through the sell side, they have to rely on company management for information. Management may provide whatever they have, or whatever they want investors to know. This makes it difficult to evaluate a company objectively and, thereby, creates greater inefficiencies.

Lower liquidity in frontier markets also creates inefficiencies. Investors are not trading every time a company makes an announcement or a change. Paradoxically, this lack of buy-sell activity limits opportunities for additional trading. This is unlike developed markets, such as the United States, where every time Apple (for example) announces a new development investors are prone to trade the stock, and the price typically reacts immediately.

Investor community

Emerging markets have been institutionalized, while frontier markets still remain out of bounds for the mass market. As is, for the typical investor, the more common way to access frontier markets is through emerging market funds. In addition to barriers, such as regulations or inaccessibility to the marketplace, most individual investors face psychological hurdles as well. It’s still difficult for many to grasp the concept of frontier markets. It can also be challenging for many investors — especially U.S. investors — to think about placing bets in Africa or Southeast Asia or Latin America due to a strong home-country bias.

Risk and volatility

Emerging markets generally have high-grade risk and high-grade volatility while frontier markets tend to have extreme-grade risk and lower-grade volatility (albeit still high).

Volatility in emerging and frontier markets is driven by many of the same factors, including low liquidity and inefficiency. In emerging markets, however, we often see additional sources of volatility because more international investors have capital at stake. For example, global risk aversion resulting from policy announcements from the Federal Reserve System would likely have an impact on emerging markets. As a result — although it appears counter intuitive — we often see higher volatility in emerging markets, despite the higher risk in frontier markets. The relatively low volatility of frontier markets compared to emerging markets doesn’t mean those markets are less risky. It just means that investors are not trading as often and that frontier markets can be less influenced by global risk aversion factors.

Dynamics of oil and commodities

Fluctuating oil prices can significantly impact both emerging and frontier markets — but in opposite ways. Many or the larger emerging markets in the Russell Emerging Markets index are oil importers, so they benefit from falling oil prices and suffer when prices rise. In frontier markets, it’s the reverse. Because many of the larger frontier market countries export petroleum, lower oil prices are a negative for their economy whereas higher prices are a positive. As a result, lower oil prices generally boost emerging markets while punishing frontier markets.

A similar, but less dramatic, dynamic exists with copper, particularly for frontier markets in the Copper Belt of Central Africa. The price of copper typically has little effect on emerging markets (larger countries are importers), but can have a noticeable effect on some large frontier markets. Since many frontier markets are heavily dependent on natural resources, their economies often rise and fall with price gains or drops. As a result, these headwinds and tailwinds can often disrupt the market cycle. Emerging markets, on the other hand, are generally less vulnerable to such commodity fluctuations since their economies are more diversified and, therefore, more closely aligned with the consumer and financial sectors.

Geopolitical issues: global vs. local

Both emerging and frontier markets are sensitive to geopolitical issues. However, while emerging market valuations are impacted by global issues, frontier markets tend to be more swayed by local issues.

The reason for this difference is simple. Emerging economies have more established markets with a larger number of foreign investors who have made long-term bets on their economic growth. By contrast, frontier markets don’t have the same level of maturity and foreign investment. For example, if an election in Nigeria goes sour or a new conflict erupts in the Middle East, those issues often impact frontier markets in those immediate regions while having little impact on a broader scale globally.

Demographic bets

Both emerging and frontier markets are often characterized by a growing middle class — a population that is coming out of poverty and acquiring more buying power. This has the potential to create an economic tailwind for consumer companies. While the actual number of middle-class consumers in emerging markets is far greater, especially in countries like China and India, the rate of growth of the middle-class consumers in frontier markets is more dramatic. Still, betting on the ascending middle class in either emerging or frontier markets requires patience and a long-term investment strategy.

With a growing consumer base in both emerging and frontier markets, companies that serve those customers are increasingly attractive to investors. But, consumer companies in frontier markets face much higher risks. They buy and sell in the local currency, and they operate in regions where revolution or government intervention are real risks that could devalue the currency or undermine the economy.

In summary, the contrasts between emerging and frontier markets are stark in some respects and nuanced in others. A simple compare/contrast exercise can help tease out investment opportunities and risks. For bold investors with a penchant for far-flung places and a long-term horizon, frontier markets may offer the same sort of speculative opportunities and potential rewards that emerging markets once represented for previous investment pioneers.

Learn more about frontier markets

Disclosures

The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances.

Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than US and longer-established non-US markets.

Russell Emerging Markets Index: Measures the performance of the investable securities in emerging countries globally. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time.

This material is not an offer, solicitation or recommendation to purchase any security.

Please remember that all investments carry some level of risk, including the potential loss of principal invested.

They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Diversification does not assure a profit and does not protect against loss in declining markets.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

The Russell logo is a trademark and service mark of Russell Investments.

First Use: September 2015
CORP: 10591

 

[Indos]

This is a good thread.

 

[Nilgiri]

This is a good thread.

Nice thread resurrection bro