Capital competition in emerging markets

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Capital competition in emerging markets

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Capital competition in emerging markets

In the last few years, a trend has developed amongst the policymakers in countries with developed economies (namely the US, EU and Japan): reducing interest rates to near-zero levels in order to stimulate growth and maintain employment against the negative impact of the 2008/2009 financial crisis. The thinking behind this initiative is twofold: encourage the use of credit facilities in business and industry, and inspire consumption (the main driver for growth in any country).

When negligible interest rates fail to stimulate economies, these countries resort to large-scale asset purchases – such as corporate bonds or mortgage-backed securities – leading to a situation where a developed economy has a lot of money in the system without the higher interest rates (and therefore yields) that attract investors. This causes investors to turn to emerging markets like South Africa (SA), which present a worthwhile risk against the low returns of established economies.

So what happens when developed economies or countries with similar risk profiles raise interest rates? Take Turkey (which saw major interest rate increases earlier this year) for example; what impact would this have on an emerging market like SA?

The answer is simple. When Turkey raised its interest rates, it offered investors better returns than SA, forcing SA to review its interest rates in order to maintain its competitive edge.

The situation is further intensified if a more-developed economy than Turkey raises its interest rates. They are deemed as low risk, but are now offering a higher return; this is the situation where you will see a typical risk-on risk-off scenario, and an exodus of investment from emerging markets.

Most emerging markets are typified by their large foreign debt and denomination in offshore currencies. In economic terms, this is characterized as a large current account deficit and a heavy dependency on foreign capital inflows. In this setting, policy makers have to find incentives or policy measures to stay ahead of the capital competition.

Three of the BRICS countries – namely Brazil, India, and South Africa – are considered particularly exposed to an exodus of foreign capital, which is why all these countries have seen increases in interest rates over the past few months. It’s not a huge coincidence that many interest rate hikes (and Argentina’s currency control relaxation) occurred just after the US decided to scale back on its asset purchasing program.

The US dollar is the world’s leading reserve currency; a weak US Dollar translates to weaker currency reserves. Emerging markets should find ways to protect themselves from such foreign capital challenges, for instance to have measures that channel foreign capital into long-dated investments that will sustain growth and development. But the sheer power of developed economies will still always be felt, so it is crucial for developed nations to act with great responsibility and to work together with emerging economies to reduce the adverse effects of their own policies.

For FX investors, the possibility of increased risk – and the investment opportunity that comes with it – is clear. The effects of a major economy deciding to change rates without due diligence would be considerable, and such volatility could have a marked effect on all markets. Binaries are one of the ways investors could take advantage of this volatility, by tracing the ripples from major announcements to predict their impact on various FX markets. Though of course, despite their limited risk, the possibility for significant loss also remains.

Keeping a close eye on international economic developments is sometimes not enough for successful forex investment, without an idea of how underlying factors may play out. Understanding these factors, though, can reveal multiple new avenues for binary trading.

Charles Ntjana works on IG’s CFD trading floor. For more information: http://www.ig.com/uk/cfd-trading

Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.

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Competition heats up in emerging markets

Alex Davidson

E-commerce and fintech startups are changing the investment landscape in developing countries

Increasing use of smartphones, like here in Dharamsala, India, has sparked greater competition for customers in emerging markets.

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New investment opportunities are emerging in emerging markets.

Traditionally, individual investors looking to get into emerging markets such as China, India and Brazil have focused on a narrow band of market-leading companies in commodities, finance and telecommunications. The thinking was that only a few companies could weather turbulent economic or political climates.

But emerging markets are becoming more competitive, thanks in large part to the growth of a younger and wealthier urban middle class. Over the past 20 years, the average gross domestic product in emerging-markets economies has tripled to about $9,000 per capita from about $3,000. That new wealth, coupled with the increasing use of smartphones, has sparked greater competition for customers who have money to spend and manage, and new consumption habits.

“In emerging markets there has been the idea that [traditional telecom and finance companies] were required to reshape the commerce and finance order in the digital age,” says Gerardo Rodriguez, portfolio manager of BlackRock Total Emerging Markets fund. BEEAX, -1.01% “But as in the U.S., people are coming to the realization that the revolution can only happen through disruptive innovation coming from new companies.”

“What we are seeing now in [emerging markets] is just the beginning of a big wave of adoption of new ways to buy things online and deliver financial products and services,” Mr. Rodriguez says.

More entrepreneurs

The populations of emerging-markets countries have been growing wealthier and more networked for years. But what is changing now is that young people in countries like India, Kenya and Argentina are starting their own companies.

“In many cases, there is a local entrepreneur who decides he or she wants to start an e-commerce company, comes to the U.S. for school, then gets hooked up with Silicon Valley and Ivy League money,” says Kevin Carter, founder of Big Tree Capital and chairman of the index committee for EMQQ Emerging Markets Internet & Ecommerce, EMQQ, -2.12% an exchange-traded fund aiming to take advantage of the growth of e-commerce and financial technology in emerging markets.

One example is Marcos Galperin, chief executive of MercadoLibre, MELI, -1.81% a company often referred to as the Amazon.com AMZN, -0.63% of Latin America. Galperin earned a master’s degree at Stanford before founding the company. MercadoLibre has formed a strategic partnership with eBay, EBAY, +0.75% which took a 19.5% stake in the company.

E-commerce companies like MercadoLibre in Latin America and Alibaba Group Holding Ltd. BABA, -0.94% in China provide platforms that help local entrepreneurs launch their own firms, which often get backing from local giants, sometimes including the marketplace firms themselves. Carter says his fund invests in large firms, like Alibaba, that have invested in local e-commerce and fintech companies, which in most cases are unlisted.

Meeting a need

Karan Sharma, a director at Avendus Capital in Mumbai, says the growth of e-commerce and financial technology and the emergence of startups in those sectors “is being driven largely due to an unmet need.” Young people in emerging markets now expect that they should be able to book a train ticket or hotel and buy clothes or just about anything else they need on their phones. And increasingly they also expect to be able to manage their finances on the go.

Online financial-products marketplaces are gaining traction, Sharma says, “as digital channels are emerging as more transparent, consumer-friendly and cost-effective channels for distribution of insurance, banking and investment products.” Similarly, he says, “innovative fintech companies” are building up the consumer-lending sector.

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To be sure, startups face tremendous challenges in any market, and for the fintech sector there is a lot of uncertainty about how regulation could affect the growth of companies. But what is clear is that emerging markets are no longer just about a small group of big, established companies.

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