Many professional investors agree. The term EM is at least 30 years old, and was originally coined to replace the unacceptable neo-colonial connotations of “less developed markets” and even “third world markets.”
It has done its job well, supported for a while by the BRIC classification which was a refinement of EM theory, and has led to billions of dollars being channeled into economies which needed the money for essential economic growth and infrastructure development.
But, as Naqvi said, it is time to ditch it. How can China and South Korea, two of the biggest and most vibrant economies in the world, be regarded as “emerging?”
They, and others like India, Brazil and Mexico — all classed as “emerging” by index compiler MSCI — have surely and fully emerged.
Saudi Arabia, which is set to be included in MSCI’s emerging category next year, will no doubt benefit from the change, but wouldn’t it be better off in a “global growth index”, given the immense potential of the economic transformation underway in the Kingdom?
Anyway, the debate will continue until somebody has the gumption to scrap the EM classification and replace it with something that more accurately describes the modern investment world.
But then Naqvi, in the course of an eloquent talk, made a very important point. “The only sense in which they [EMs] are still emerging is in terms of governance and transparency,” he declared.
He explained that corruption, lack of transparency and a general refusal to “play the game” by EM corporates had affected the view of western and other investors, and resulted in lower valuations, higher risk assessments and a reluctance to commit capital on the part of big western investors used to their own, generally much higher, standards of governance.
Some experts now argue that governance, or rather the lack of it, is a far more important investment criterion than geography or industrial sector. A well-run, transparent company will always carry an investment premium for big western investors, regardless of where it happens to be in the world, or what business it is in.
Executives of EM companies regularly pay lip-service to the need for better governance, and in some cases actually implement policies — codes for financial reporting, remuneration and recruitment — that might facilitate it.
But the problem stubbornly remains, and the most significant factor that remains behind virtually all cases of the EM discount is simple: Government control and interference.
Corporate governance, or lack of it, may be a better guide in determining what constitutes an emerging market rather than geographical location in the modern investment world.
Sovereign governments in EM markets invariably control the big corporations that are regarded as “national champions.” Where they do not control them directly through majority shareholdings, they do so via the power of appointment and regulation that they jealously retain. It has a chilling effect on investors to know that the corporate environment in which they are involved can be changed for the worse at the whim of a mayor, or a minister, or a president.
It is an issue that Saudi Aramco must face in the coming months as it prepares for its record breaking initial public offering on global exchanges. The plan at the moment is to float only 5 percent of the Kingdom’s oil giant, and this has raised concerns — in London especially — that investors could end up powerless in the position of minority shareholders in a company 95 percent owned by the Saudi government.
Sources close to Aramco say it is working on a full range of measures to ensure minority protection within a framework of international standard corporate governance. How successful it is in this regard will be reflected in the valuation the market puts on the company when it finally lists.
Naqvi advocated other measures investors could use to encourage proper governance standards in the EM targets they might be considering: a “corporate foreign policy” whereby investors make it apparent to potential investment targets that there are certain things they will not do. If the target does not adhere to certain basic standards, they will not get the money. “Think like stakeholders, not shareholders,” he said.
At the risk of being self-serving, I would add that there is another factor that should figure in investors’ calculations of EM value: Whether or not that country has a media structure that allows the press, TV and online outlets to scrutinize and analyze corporations, and where necessary constructively criticize them and publicize their shortcomings.
For all the talk of the “death” of mainstream media, many investor decisions are still influenced by what they read in, for example, the Financial Times, Wall Street Journal, or the Nikkei newspapers and their websites. Maybe it is time for the media in global growth countries to emergeas well.
• Frank Kane is an award-winning business journalist based in Dubai. He can be reached on Twitter @frankkanedubai