Friday 24 August 2007

Ethics and Investment Performance in Emerging Markets

One of the major reasons why most people in the 'developed' world are still sceptical about emerging markets is the issue of ethics. Theres been many strong debates about whether doing business or investing in emerging markets should be any different from the more developed market.

For most people investing for the long term - ethics, governance, social and environmental issues have become more relevant. I have been thinking on why these issues should be more important or relevant than financial performance.

Even the challenge posed by climate change is not as serious in emerging markets as it is presently in the developed market. China is one of the largest consumers of energy but even the Chinese government says about 70% (700 million) of its population still live in abject poverty and in rural areas, this is despite the rapid growth of the economy.

What these suggest is that by all means China, Inida and other serious emerging markets will continue to pursue growth and development…and probably at the expense of the environment. Is that ethical? The G8 countries will also continue to mount pressures on these countries to cut carbon emission (devilishly I'll call that 'suspend development') and my question remains the same..''is that ethical''?

So how do we define ethics, how do emerging markets become developed markets if they cannot use the same source of energy that the developed world has used to get to where they are today? Yes there are lots of research going on to develop energy-efficient fuels but how long will that take so as not to hamper continuos growth? These are some of the questions long term investors are asking before they invest their hard-earned money in these markets. If the more developed economy can force the emerging markets to 'suspend development till we find energy efficient fuels', would it still make sense to invest or do business in these markets?

Another main argument of the guys 'suspicious' of investments in emerging markets is that most of these markets have got an ageing bull market which makes investors to overvalue growth and undervalue risk. I mean I'm so excited about some of my investments in one of these markets (even though I just started!) and I'm almost being carried away by the performance. I guess the key to navigating these risks is to undertand that corporate governance is getting better in these markets and over time the issues of ethics, governance , social and environmental issues that affect business and investment performance will be given the attention they deserved. Meanwhile, it's time everyone started to understand how to play in these markets because in business, ignorance is not bliss. The time is coming and its already here gradually when it wouldn’t matter where you worked, lived or do business as changes in the macro-economic environment in a country will have a ripple effect all over the world.

What do you think will happen to the share price of FTSE or Nasdaq quoted companies if their Data Centres in Brussels crashed, if their Call Centres and Software Developers in India are on strike. More and more these boundaries will fade into insignificance…and that’s why I think we should define ethics with a win-win paradigm (if that’s possible) and also balance our portfolios with investments & business operations in emerging markets.

So what do you think about my rantings…of course I have a biased position already :) but I'll like to know what you think…for, against or neutral and if it’s a superior argument I might move to your camp!

Thanks for reading!