Farid: A guide to investing in developing economies around the world

http://www.paydayangels.co.uk/guide-investing-developing-economies-around-world/

A GUIDE TO INVESTING IN DEVELOPING ECONOMIES AROUND THE WORLD

Author: Muhammad Farid, Published: September 16, 2013

Ever since the financial crisis, developed economies have failed to recover as they would have liked to. Investors are reluctant to invest, consumers are wary of spending and macroeconomic indicators have not been very encouraging. In such times, an investor needs to be proactive rather than reactive, and find new places to invest in order to get enough returns to cover himself against financial fluctuations. This sounds like a good idea but it is very difficult to keep finding new territories to make good, high-returning investments. It may seem difficult, but it is certainly not impossible. All it needs is a bit of researching – finding out trends – and using common sense. Before the financial crisis hit the world, the developed economies were booming; investors were investing, consumers spending and economies growing. But after the crisis, the developed economies were no longer investors’ ‘safe havens’ that they once used to be. Investors needed to switch to better places.

farids-graph-1Keeping in view the dire need of investors to keep finding better places to invest in, I propose below what opportunities are out there in the world market today – especially when the developed world is not functioning as well as it was anymore.

The good news is that there are massive opportunities in Less Economically Developed Countries ( LEDCs), which if exploited well, can yield massive returns.

THE FUTURE BELONGS TO LEDCS

It looks like the developed world is now in many places saturated in terms of investment opportunities. On the contrary, the LEDCs are the new heaven of great investments – it has enormous potential to grow, with some of the LEDCs containing the world’s largest populations.

The potential of the LEDCs is highlighted by the fact that these economies have been growing way more than the developed ones in recent times. The rise of China (1.3 bn people), India (1.2 bn), Indonesia (237 mn) and Brazil (201 mn), have all opened a new window of great opportunities for investors. These countries have growing economies, large populations full of people needing work and great ability to expand, thus, all the ingredients necessary for successful investments.

The above is justified by UN’s World Investment Report which states that LEDCs are the place to invest in the future – some investors have already began to do so. According to the report, global foreign direct investments (FDI) increased in LEDCs, while it decreased in the developed world in 2012. Thus, LEDCs now accounting for 52 percent of all the global FDI, while the developed world contains only 42 percent (the rest is flown in to the least developed or transitional economies).

Although the overall investment figures have dropped in 2012, the investment trend is towards LEDCs. Asia, Africa, Latin America and all other regional economically developing countries witnessed a rise in their FDI levels in 2012. FDIs in 2013 are expected to be more or less at the same level as that of 2012, while 2014 and 2015 are forecasted to see an increase in the overall FDI mostly directed towards the LEDCs of course.

Farids-graph-2farids-graph-3

The above two graphs contain the data of investment flows in the last few years. It can be noted that the investment level in LEDCs have increased, reaching a steady level in 2012, which is greater than the developed world’s level – something that has happened for the first time in history. The graph gives a detailed regional flow of capital in the world.

As you can see, Asia has been the main place where a lot of investment has been flying to. It accounted for 30 percent of all the capital inflows directed towards the economical developing countries. The graph also shows the FDI outflow level, which suggests that outflow has been way more in developed countries than in economically developing countries.

The second graph shows the overall FDI flow in the world, and forecasts into the future. It can be easily seen that the FDI flow will increase in the future (indicated by the green shaded area). Thus, investors are going to enjoy the next few years, provided they invest wisely – the economically developing world is the place to go.

WHERE IN THE ECONOMICALLY DEVELOPING WORLD?

It is quite evident from the graphs given above that the world has been directing its focus towards LEDCs. Foreign investments have increased for the first time in history compared to the figures for the developed world. But the question is, will this trend continue into the future? And if they do so, what are the sectors that these investments will be directed to?

According to Investment Promotion Agency (IPA), each region in LEDCs have different sectors that are vital for the world investment in the future. In Africa, sectors that are predicted to receive most of the investments in the next few years are the agriculture and mining sector, while Latin American countries are going to see rising figure in their extractive industry, tourism and services. The agency estimates that Asia is going to see a rise in agriculture, oil and gas, food products, construction and transport.

Africa

Considering returns relative to other industries in Africa and contrary to popular belief, the help being offered with regards to upgrading machinery and technology for African farmers has placed agriculture as probably the best option for investment, albeit mining and petroleum. Thanks to the growing tourism industry rising in areas such as Egypt, Morrocco, Mauritius and South Africa, certain areas within the hospitality sector, such as hotels and restaurants have great potential too. The rate of return from investment in Africa is higher than most other countries.

The graph below portrays which particular sector of industry is expected to be the most promising to invest in and in which country.

Asia

Asia is still thought of as one of the best places for world investment. A continent with emerging economies like China, India, and Indonesia (countries with huge population) is certainly a good place to consider investing in particular, China’s economic growth has witnessed a substantial increase over the years due to several factors from within, and also from foreign investors around the world.

In 1992 China’s leader opened up the exportation of its southern coast manufacturing industry to the world, which set in motion the changes that would see China rising to become one of the largest exporters of manufactured goods in the present climate.

In addition to this, the ongoing foreign investment into the commodity boom which started in 2000, embraced by much of the younger population, has enhanced China’s economic growth to where it is today, despite recent studies showing a slight drop or steadiness.

Despite the levelling out, China continues to be a popular destination for foreign investments and will do so for many years to come. The same can be said for India’s efforts to jump on the economical growth train. In and around 2003,  multinational companies were outsourcing their customer service call centre work over to India. Places like Bangalore soon became popular destinations for foreign businesses to move in and offer jobs to keen workers, educated in speaking English, and willing to work for a wage lower than that of the western population. This in time boosted India’s economy over the next decade, along with other investment factors, such as the retail industry, which is also becoming another reliance of India’s economic growth.

Regardless of the recent financial crisis which affected the developed world, both have huge potential to keep growing and experienced far less of the effects from the crisis compared to the developed world. Which is why, investors should look towards these markets, especially when they are encouraging foreign investments (India liberating its restrictions on FDIs).

Asia has an enormous population and hence enormous profit earning opportunities. Investment in the stated industries below would certainly yield high returns on any investments made. Now, with the developed world riding back towards economic recovery, the world’s economy is expected to be stable in the future, which means stable growth in LEDCs and hence higher returns over an extended period of time.

So, if you are still on the fence due to the current climate of Asia’s growth spurt levelling out, but still looking at the possible investment opportunities, here are a few sectors that may be worth considering. According to Investment promotion agencies (IPAs), sectors like Agriculture, forestry, fishing, construction, transport, storage, communication, food, beverages and tobacco have enormous potential to grow and yield high rate of return.

Most of  Latin America is considered as an LEDC within the world, as far as investment oppotunities go. Brazil has been one of the fastest growing economies of the world in recent times, mainly because the of its rainforest providing so many different resources in which investors can take avantage of. Most of the countries in Latin America and the Caribbean have potential to grow in the future which means better, extended and stable prospects of investment.

However, before investing in any country, it is wise to know about what sectors can prove beneficial. Latin America and Caribbean have potential industries like mining, quarrying, petroleum, hotel, restaurants and other services. These industries can yield high rates of returns in the future as noted by UN’s World Investment Report.

Brazil has been the leading economic force, along with India and China, of the last decade and has the potential to still grow strongly. Within the investment opportunities, lies the expansion of logistics. As there have been many businesses investing in Latin America and the Carribean already, there is great need for the development and upgrade in how the resources are transported to and from ports. According to a study from the University of  Hofstra in New York, Latin America and the Carribean accounted for 88% of the net growth from all of the America’s from 2005-2010, putting great pressure on the freight distribution systems currently in place to upgrade their logistical capabilities.

The opportunity is there for all the investors that do not want to invest in the developed world any more. It is noteworthy that the world economy is expected to show decent growth in the future, which means more stability economically and hence safer investment environments in LEDCs.

Transition economies are the ones that are in the process of changing from socialism into capitalism state of economic system. These economies have potential to grow and are considered to be places of profitable investment.

Industries considered having better investment opportunities include machinery, equipment, leather, textile, clothing, food, beverage, tobacco electricity, gas and water.

It is noteworthy that all these industries are the ones which we economists term as the ‘basic necessity goods’ industries like food, clothing, gas, water etc. These are goods which everyone needs at all times. So investment in these industries means a long term benefit.

CONCLUSION

The developed world received a heavy blow when the financial crisis hit the world. Investors were no longer confident to invest in the western world, especially when some European countries were close to bankruptcy. The world’s largest and most powerful economies were in tatters. Investors – with shattered confidence – were no longer sure about investing in the developed world.

The answer to their problem are the LEDCs. Having already began to invest in LEDCs, evident from the recent rise in FDI figures, many investors are already looking towards the emerging markets for the future.

The emerging markets indeed carry huge opportunities. But prospective investors need to be careful if they are considering investing into these markets. Whilst Africa can be a great prospect for investment in the agriculture sector, transition economies propose tremendous opportunity in the clothing, gas, electricity and gas industry. India has the world’s second largest population where investments in telecommunications, construction and agriculture can yield high returns. Similarly, Latin America has huge potential in the mining sector and restaurants.

Hence, there are many different industries which investors can take advantage of. Depending on their ethical views, all an investor needs to do is to pick a continent, pick their favourable industry and invest and reap the benefits in future – big time.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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