Aussie investors might be missing billion-dollar EMD opportunities on their doorstep, but are the risks greater than the rewards?
Commercial broking firm Acuity Funding has identified $US70 billion in opportunities in Vietnam, with a further $US50 billion of opportunities in Indonesia and Malaysia, mostly in the form of infrastructure projects.
Large-scale infrastructural development projects in these countries are often unable to access domestic financing, making them an attractive opportunity for investors on the hunt for yield amid a global low interest rate environment.
“There is simply not enough capital to inject into the many projects needed to help these nations develop,” said Acuity managing director Ranjit Thambyrajah.
“The IMF has suggested that external funding from foreign investors is a key ingredient for the successful development of emerging market economies.”
But while EMD is an attractive opportunity, it comes with plenty of downsides.
“Investors need to be discerning when investing in EMD given the local currency bond markets are very idiosyncratic in nature with low intra market correlations,” Nick Schoenmaker, Senior Investment Specialist at Aberdeen Standard Investments told Investor Daily.
Emerging markets also tend to have higher rates of insider trading and corporate governance issues due to lax governmental oversight and a lack of regulating bodies.
Political volatility and social upheaval also make the process of investing in EMD substantially harder – especially in the Asia Pacific.
Vietnam in particular has often found itself at the mercy of Beijing, stopping and starting development on multibillion-dollar energy projects in the South China Sea depending on the whims of China’s navy.
Indonesia also faces change, with its populist government staring down the barrel of a fundamentalist Islamic social revolution that might make the fledgling market deeply unattractive to both tourists and investors.
Some of the risks of EMD can be averted – or at least reduced – through a range of strategies, including employing local specialists and using on-the-ground teams rather than a single manager in another country.
But EMD will always be a shaky prospect, and investors should pay close attention to what they’re buying.