Monetary policies have reflected lessons learned from 1997. Many countries have chosen to accumulate significant foreign-exchange reserves and have adopted floating exchange rates—eliminating currency pegs to the US dollar, and therefore, the risk of a sudden collapse in currency exchange rates is significantly lower today. Emerging-market currencies have already experienced a gradual readjustment (a steady 28% decline since January 2010), reducing the odds of an abrupt adjustment. Moreover, IMF figures also confirm a long-term decline in external debt as a percentage of GDP from a peak of 41% in 1999 to 25% in 2013, which materially lowers the risk of a currency shock. These economies are further strengthened by the fact that many countries have had current accounts in surplus in recent years (Figure 3).
All in all, despite overall optimism, investors today should remain cautious and watch closely for specific economic and political risks. There is no such thing as a single “emerging market” today, and opportunities as well as risks must be assessed on a country-by-country basis (see Figure 4).
Properly selected emerging markets will continue to offer significant opportunities for investors to realise attractive returns on their capital. Investors need to be selective and diligent when considering vehicles through which to allocate capital to these high-growth markets. Managers with significant on-the-ground experience and market-by-market know-how should be able to selectively source attractive deals and ensure appropriate structuring, particularly around currency risk, which is instrumental to manage potential risks and to ensure attractive returns.
An abridged version of this blog appeared in The Economist Insights, 12 June 2014.
1 Consuming class: daily disposable income in >$10; below consuming class: <$10; incomes adjusted for purchasing parity, McKinsey Global Institute analysis
2 McKinsey Global Institute analysis
3 Price-Earnings-Growth ratio: a valuation metric used for determining the relative trade-off between the price of a stock, the earnings per share and the company’s expected growth
4 Country PEGs calculated using the Price-to-Earnings ratios of the country stock market divided by the nominal country GDP growth rate
5 Emerging markets account for approximately 27% of public market capitalisation versus 38% of global GDP, while they represent only 12% of total private equity capital raised in 2012
Geoffrey is a Managing Partner and Head of Investments at Delta Partners with over 17 years of experience in Investment Banking, Private Equity and Strategic Management Consulting. Prior to joining Delta Partners in 2010, Geoffrey worked at TPG Capital in Moscow, London and Paris. Prior to TPG, he worked at Security Capital Group, McKinsey & Company, Goldman Sachs and PaineWebber. Geoffrey received a J.D. from Harvard Law School, an M.A.L.D. from the Fletcher School of Law and Diplomacy and a B.A. from Yale University.
Michaël is an Associate at Delta Partners Capital with 11 years of experience in Private Equity, Strategic Management Consulting and the Consumer Goods Industry. Prior to joining Delta Partners Capital in 2010, Michaël worked for BCG in Brussels covering projects in Europe. Prior to joining BCG in 2006, he worked for Procter & Gamble. Michaël holds a Bachelor degree in Economics and a Master of Science in Electrical Engineering from the University of Leuven, Belgium. During his engineering degree, Michaël spent one year studying at the Ecole Polytechnique Fédérale de Lausanne, Switzerland.
William is an Associate at Delta Partners Capital with 3 years of Private Equity and Investment Banking experience in Emerging Markets. He joined Delta Partners Capital in January 2014 and has been actively involved in the screening and execution of investment opportunities. Prior to joining Delta Partners Capital, William worked for HSBC in the Mergers & Acquisitions group covering the Middle East and North Africa. William has a Bachelors of Arts from Yale University, majoring in History (with an economics and business history focus).