Photos from left to right: the main branch of United Overseas Bank Ltd in Singapore; Singapore Airlines fleets parked at the terminal of Changi International Airport in Singapore; conveyor belts transport mounds of iron ore to the stockyard owned by mining company Vale in Maranhao in northern Brazil


Indeed, according to The New York Times,


three of the largest markets for initial public offerings last year were Hong Kong, China’s Shanghai and Shenzhen. In the first half of this year, private equity firms raised $22.6 billion with their focus on emerging markets. This compares with $23.5 billion for all of last year. In Wall Street or the City of London, there is popular anger at bailouts of insolvent banks and the asymmetries of ‘too big to fail’. In Shanghai, the entrepreneurs behind Baidu or white goods maker Haier are folk heroes. And yet emerging markets are a


miscellany and far from homogenous. They split into the resource-rich and the raw material importers; the capitalist and the more statist; the city states and the continental-sized economies. Standards of governance vary hugely. As we never tire of telling investors, the high growth impresses but the quality of that growth and how one can participate in it need to be teased out.


Expansion, opportunities and globalization To illustrate what I mean, compare India and China. India is the world’s largest democracy, English-speaking and a society that upholds the rule of law. It is vast in contradictions, however. Poverty is endemic, it depends heavily on agriculture (and by extension on the annual monsoon) and has some of the worst roads and ports


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in Asia. In spite of that, its best companies are superbly run, consistently raise profits and respect shareholders. China, where headline GDP growth is


even higher than the 8% India achieved last year, is different in so many respects. Its financial system is closed, the better to allow the government to control resource allocation in the form of bank lending, as well as company ownership. Savers are not paid a fair return for their savings and the stock market functions much as a casino. IPOs act as a form of wealth transfer – the companies take money in but rarely do they offer much in predictable returns. The vast majority lack transparency. If this sounds dogmatic, just look at long-


run performance. Over a 10-year period China’s MSCI China Index returned 333% whereas the MSCI India Index returned 518%. And that remember, is just the index. Managers of active strategies, like us, who do their own research, should have done much better. It is natural these two countries attract


much of the attention among emerging market investors. Size apart, they provide the most choice (although for us China is a country we approach indirectly through Hong Kong and elsewhere, where listed companies are held to higher standards of account). But what has made the emerging market asset class universe so much more interesting is its expansion. Today we find opportunities where only a few years ago none existed.


Like their Asian peers, Latin American economies have learnt that globalization is less to fear than to embrace. Brazil has been in the vanguard of developments. It has put an end to stop-go policies of wage- inflation and interest rate spirals, reduced barriers to entry and encouraged inward investment. At the same time, with more predictable politics it has moved to privatize state assets, clean up once cosy financial markets and let market disciplines take their course. The local market exchange Bovespa


launched a separate listing segment known as the Novo Mercado in 2000. Reserved for companies with the highest standards of corporate governance, companies listed there have been outperforming their lower-quality peers. This has spurred more companies to take greater strides to improve corporate governance and management. This is happening in tandem with falling levels of corporate debt, rising profitability and dividend payouts. Brazil is not alone in the region.


Mexico got an early fillip from its free trade agreement with the U.S. Chile was always a pacesetter, having a remarkably sophisticated (and emulated) pension system, and with the luxury of huge deposits of copper and other ores. Like other countries in the region, because of that, it is forging stronger ties with China, and thereby bypassing established trade routes with the West.


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