Emerging markets show sound transparency

Incentive to be honest

By Darin Tyson-Chan
Wed 17 Sep 2008

Emerging market companies are presenting a level of financial transparency that stacks up against developed market corporations.

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The perception that corporations operating in emerging market economies have poor governance and financial transparency is a misjudgement, according to a portfolio manager of the asset class.

"I trust the fundamental information that comes out of emerging markets more than I trust the numbers coming out of Enron and Worldcom and all of those guys," GMO emerging markets group portfolio manager Marco Vangelisti said.

The desire to trade on a larger number of markets around the world provides the incentive for emerging market companies to adhere to better reporting disciplines, he said.

"Emerging market companies want to play with the big boys. They want to be able to list on the New York stock exchange, on the London stock exchange and the only way to do that is to play by the rules," Vangelisti said.

"So I actually think they are playing by the rules better than the average American company, where a lot of pro-forma reporting is taking place."

Vangelisti said emerging market companies did not yet have any performance expectations that could persuade them to produce financial information on a set of unrealistic circumstances.

"The urge to fudge the numbers is directly proportional to the multiples at which you are trading," Vangelisti said.

"So if an Enron is trading at 90 times earnings, there is an implicit expectation that earnings are going to grow at a 90 per cent rate and if you do not grow them... you might fudge them so that they look like they are growing at that rate," he said.

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