By Nick Markola CIMA®
The sunny weather is here along with unusually high temperatures on Wall Street for this time of the year. It may be the sun is shining brighter because some 100 year celebrations are under way or it may be because for the first 3 months of this year, equity markets in the US and across the world posted good returns. We would like to think that Vatra’s and Albania’s 100th birthdays have something to do with it. Regardless of the cause for the unusually warm weather in North America, the markets are performing well in 2012. Many investors are asking whether this trend has legs or whether they should scale back their exposures. In either scenario, one of the follow up dilemmas is where interesting opportunities are or where to invest the potential assets if one scales back. Emerging markets is an area that is frequently mentioned. Could Albania be part of the emerging markets where investors looking for a place to invest their capital can find attractive return?
Emerging markets is a broad term and it is useful to define it first. The term emerging markets was coined about 30 years ago by the economist at the International Finance Corporation when they were promoting mutual fund investments in developing countries. Investopedia defines emerging markets as economies with low to middle per capita income. Wikipedia defines emerging markets as nations with social or business activity in the process of rapid growth and industrialization. Based on the data from 2010, there are approximately 40 emerging market economies in the world. Economies of China and India are considered to be the largest emerging market economies, followed by others in Asia, Eastern Europe and Latin America. However, it is difficult to make an exact list of emerging market economies and for the time being Albania does not appear to be on the list. With the 100th birthday approaching, the hope is that this changes soon.
Emerging markets currently represent an interesting area for investors to consider investing part of their capital and achieve possible attractive returns for a multitude of reasons. Developed markets of North America, Western Europe and Far East are going through some turbulent times. Macroeconomic developments in the developed markets of Eurozone pose a large risk. Greece is on the brink of default and has been teetering with the idea with quite some time. Italy, Spain, Portugal and Ireland also are in the risky territory and causing investors jitters. Growth rates in the developed markets (as seen on Chart 1) have been much higher in the past and that trend is anticipated to continue. The rebound in the US economy is anemic and Japan has not performed well for over a decade. However, economic fundamentals in emerging markets remain strong. The structural case for emerging markets remains strong and growth rates are much stronger than in developed markets. Chart 1, prepared by TCW, shows growth rates in the emerging markets and developed markets since 2003. In every year since 2003, the emerging markets grew at a rate of at least twice that of the developing markets and some years it was more than five times. For example, during the Great Recession of 2008, developed markets declined by 0.2% while the emerging markets grew at an impressive rate of 5.6%. In 2009, the developed markets declined by 3.7% while the emerging markets grew by 1.4%. For the current year, the developed markets are forecasted to grow at an anemic rate of 1.2% per year while the emerging markets are estimated to grow at an impressive rate of 4.7% which is almost 3 times higher. It is no wonder investors gravitate towards areas with higher growth.
Emerging market economies weathered the great recession much better than developed economies and came out much stronger. There has been a substantial reduction in sovereign risk in many emerging market countries in the past 15 years. Middle class is rising in the emerging markets and helping various sectors of the global economy. According to research from The United Nations Population Division and Morgan Stanley, in 2010, to total working age population in the world was approximately 4billion people. Of that, approximately 800 million were in the developed world and 3.2billion in the emerging markets. By 2020, predictions are that the working population in the developed economies will marginally decline while the working age population in emerging markets is forecasted to grow by approximately 400 million workers to 3.6 billion.
Inflation in the past was a major headwind for emerging markets and that appears to dissipate with time as emerging markets are growing and becoming a larger part of the global economy. Currently, emerging market countries account for over one third of the global GDP and the IMF predicts that share will grow meaningfully in the coming years. Investor capital typically finds areas of strong growth and that has been the case with emerging market economies. Despite the global turmoil, many of the emerging market economies have seen sizable capital reach their shores. Thanks to years of increasingly transparent monetary policy coupled with fiscal discipline, many of these countries have increasingly financed themselves in their own currencies rather than in US dollars, the historical norm. Balance sheets in the emerging markets remain extremely strong at the government, corporate and household level in the emerging markets. Banking system is less levered than in the developed markets and many emerging market governments have been substantially more fiscally responsible that the developed market counterparts. In the event of further market dislocations, countries with less public debt to GDP are in better position to weather such dislocations. Chart 2, prepared by TCW, shows fiscal balance and public debt to GDP for a number of countries as well as developed and emerging markets as a whole. It is not surprising to see that Greece is in dire straits with one of the highest debt to GDP ratios followed by Italy, Portugal and developed markets (DM) as a whole. The upper circle shows lower debt to GDP countries where most of the emerging market (EM) economies are.
Fiscal responsibility, with strong growth and manageable leverage has helped emerging markets. Emerging market valuations remain at attractive levels despite the strong start of 2012 and many investors continue to focus on Emerging Markets. Albania, for the time being, does not appear to be an emerging market. A lot of hard work has taken place in the country and many milestones have been accomplished since the fall of communism but the road ahead is still long. Once can point out all the things that were done well and all the things that were not done, or done wrong. As of the time of this article nobody seems to have been able to change the past. If we can’t change the past, then here are a few ideas to consider for the future, as we embrace the centennial celebration.
Starting with working together rather than against each other and putting forth great ideas/solutions instead of pointing out weaknesses in the other side.
Focus on increasing the quality of education in Albania and bringing up a strong cadre of future leaders that can establish and run businesses. High quality education results in high quality work force as the examples of Taiwan and Singapore have shown.
Uprooting corruption, simplifying business processing practices and strengthening the legal and judicial system. Without a strong work ethic, independent legal and judicial system, it is hard to move ahead and attract investor.
Entice accomplished Albanians to return to the homeland via their current multinationals they work for in the western world or by investing directly their capital or knowledge. As a result of the past migration out of the country, a large number of Albanians have been highly educated abroad and hold very important functions for various multinational companies or as entrepreneurs. They are a
Turn the country into the outsourcing hub for Europe and North America as Albanians are known to be multi lingual and easily trained in various languages. Geopolitical position of Albania is highly conducive to become the next hub
Attract international corporations to set up operations in the country to diversify their businesses and expand operations globally at attractive cost. Having one of the youngest work forces in Europe that is mobile and easily trainable, should be attractive for many companies.
Set up exchanges for capital markets is essential to increase access to capital for domestic businesses as well as allow foreigner investors to invest in Albania as another emerging market alternative.
Rather than sell assets and resources at steep discounts to attract foreign investors, attract operators to come in for an attractive profit and a benefit to the nation.
Promote industries and sectors vital to the country and the region.
Learn from others. The Four Little Dragons of Asia (Hong Kong, Singapore, South Korea and Taiwan) and Switzerland are some of the countries to emulate. A list of countries not to follow is to long for this article.
Above suggestions are just a few that could help put the country on the path to becoming one of the emerging markets destinations that investor capital seeks in the coming years. If done well, this will result in a success for the country, elevation of the standard of living for the people, higher status for Albanians and attractive returns on capital for investors. We should admire everything that has been accomplished thus far knowing that approximately 20 years ago, after the fall of communism, the country was one of the most desolate ones and we should acknowledge all the hard work that went in. Fortunately for us, great opportunities lie ahead and there has never been a better time for Albanians and Albania to accomplish great things. Challenges are part of that road ahead, but with hard work, focus and dedication, we can make sure that best times for Albanians are ahead. While investors consider emerging markets to invest some of their capital, you should consider giving back to Albania’s 100 birthday celebration and turning it into one of the emerging market economies for others to be invested in. Until then, Happy 100th birthday to Vatra and, shortly thereafter, Happy 100th birthday to Albania.
* The writer is the Co-Founder of APEN