Emerging Growth In Asia

By M. Isi Eromosele

All indications argue against a hard landing for China and other emerging Asian countries, as tightening measures aimed at managing inflation without choking off growth seem to be working.

During 2013, expect to see improved market performance in the second half of the year, with inflation worries easing and global capital flows resuming into the region.

Asia Regional Outlook

For the emerging Asia region, there will be an equity market recovery in the second half of 2013 from the underperformance of the first half, with Central Banks’ tightening measures gradually easing as inflation worries abate, particularly in China and India. Earnings growth forecasts continue to look achievable and valuations are attractive relative to other assets.

There will be no hard landing scenario for China. Government fiscal measures, such as the acceleration of affordable housing construction and accommodative monetary policies providing easier credit availability to small and medium-sized enterprises (SME) are likely to achieve the solid economic growth in 2013, as envisaged in the Chinese government’s five-year plan.

There will be a resumption of global capital flows into Asia after the summer of 2013, as investors gain confidence that economic growth in Asia is likely to be stronger than in the developed world in both 2013 and 2014, and they see more signs of the end of the monetary tightening cycle as headline inflation begins to show a clear downward trend.

In China, rising wages have been one of the main drivers of inflation, which has been offset by rising productivity levels over the past two decades. Tightened monetary policies, including interest rate and reserve requirement ratio hikes, have already been effective in decelerating inflation pressure. As a result, equity performance should improve going into the second half 2013.

In India, despite 10 interest rate hikes since March of 2010 amid inflationary pressures, the fundamentals of the economy remain positive due to strong domestic consumption.

As in China, core inflation in India has been on a structural uptrend in part due to social development policies, improving wages and increased consumption. Investors are likely to continue closely monitoring India’s wholesale produce index, particularly after the government raised diesel prices to strengthen the budget deficit.

Slowing demand from developed markets might generate headwinds for Korea and Taiwan, particularly for some tech products. Lingering investor concerns about a more significant slowdown in China’s economic growth might further weigh on North Asian exporters. On the other hand, the fact that production disruptions

following Japan’s earthquake have not had a prolonged adverse effect on component manufacturing should be positive for the sector.

Political concerns have eased in ASEAN countries, resulting in more positive sentiment among both foreign and local investors. Regional private-public-partnerships should improve business efficiency and establish needed infrastructure, while policy reforms to lift minimum wages should boost domestic consumption.

Though Asia’s economic growth will likely moderate slightly in the second half of 2013, overall growth in Asia will still expand at more than twice the pace of growth in developed markets.

Slower growth should also help alleviate inflation and inflation expectations, which have been the key worries for market investors. Several key regions are in the advanced stages of their tightening cycles, which should bode well for investor sentiment. Positive investor stance towards consumption, technology and software, infrastructure and energy sectors should be maintained.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group

Growing Uncertainty About China’s Economy

By M. Isi Eromosele

Economically, China is in a balancing act at this time as it seeks to shift from an export-dependent model of growth to one based more on domestic consumption.

While the economy still has underlying strengths, there are imbalances in the economy that could slow the pace of that growth. Of particular note are remaining gaps in the social safety net that continue to drive high personal savings rates and the need to further reform the country’s financial system.

Today, doubts about the sustainability of China’s high growth of recent years have resurfaced. China optimists contend that high domestic savings, a surplus of cheap labor, strong foreign direct investment and a healthy central government balance sheet will

fuel growth for years to come.

China pessimists counter that overinvestment and excessive credit creation have resulted in a bubble in the real estate market that will cause a hard landing for the Chinese economy in 2013.

The truth probably lies somewhere between the above two extremes. Although a hard landing for the Chinese economy is not expected in 2013, there should be concern that the build-up of fundamental imbalances will slow the pace of economic growth.

The best hope China has of sustaining its high growth rates is to transition from its export/investment-led growth model to one driven by domestic consumption. China has made some progress on this front, but gaps in the social safety net continue to encourage households to save a disproportionately high share of their income.

Chinese leaders must make rebalancing the economy and reforming the financial sector top priorities if they are to prove the pessimists wrong.

Economic Underlying Strengths

China’s economic success has sustainable roots. These include high domestic savings; strong foreign direct investment lured by the size and growth of the Chinese market; substantial migration of workers from the relatively low productivity rural jobs to relatively high productivity urban jobs; general openness to international trade; low labor costs; a relatively strong central governmental balance sheet and an exceedingly entrepreneurial and ambitious people. Most of these supports to growth will remain.

Thus, the long-term economic growth prospects for China remain favorable, especially compared to the more troubled developed world.

However, demographics are changing as the population ages and the surplus of labor gradually diminishes; wages are on the rise, threatening China’s export competitiveness versus its Southeast Asian neighbors; Chinese financial markets remain relatively immature; capital is allocated by state agencies rather than the market and the environmental costs of rapid growth are becoming more obvious.

China has attempted to address these challenges in two ways. First, by rebalancing the economy away from exports and investment and toward domestic consumer spending and second, by introducing financial reforms aimed at gradually liberalizing interest rates and increasing the flexibility of the exchange rate.

Unfortunately, progress on these fronts has been slow, while the old growth model based on export and investment is gradually becoming less viable.

Phasing Out the Old Growth Model

The Chinese export machine is already slowing. While China still has a large positive

trade balance with the United States, its trade surpluses with the rest of the world have diminished. China’s competitiveness has declined as a result of the gradual appreciation of its currency, the Chinese Renminbi, higher inflation and faster wage growth.

Chinese exports have also been hurt by slowing global growth. Approximately

19 percent of demand for China’s goods comes from Europe and roughly 17 percent

from the United States.

Arguably, Europe is already be in recession and U.S. economic growth is slow. The contribution of net exports to China’s incremental GDP growth has been minimal over the past two to three years. All indications are that trade surpluses will shrink further and that net exports will not be a driver of GDP growth in the next few years.

The outlook for fixed asset investment is not much better. The Chinese government responded to the collapse of global demand in 2008 with a massive fiscal package aimed at infrastructure and property investment.

As a result, fixed asset investment increased at 20-30 percent annual rates, contributing 90 percent of GDP growth in 2009 and over 50 percent of 2010 growth. If it were not for fixed asset investment increases, Chinese economic growth in recent years would have been at rates of only 4-5 percent, not 9-10 percent.

Perhaps the most vulnerable segment of fixed asset investment is private property. Real estate markets are a huge driver of economic activity. Construction directly represents about 14-15 percent of China’s GDP and related activity probably contributes 25 percent of GDP.

An estimated 60-70 percent of household wealth is in private property. Residential real estate has been in a spectacular boom. According to the International Monetary Fund, property prices are up 60 percent in most areas since 2006. The boom is cooling. There could be a severe decline in the country’s real estate market.

The Vital Role of the Household Sector

The household sector can probably pick up some of the slack from the slowdown in investment and exports. There is strong indications that consumer spending is

both strong and less cyclically sensitive than other sectors. In fact, consumption

has contributed a consistent 4+ percentage points to annual Chinese GDP growth in recent years.

Forces supporting household spending growth include strong income, based in part on government-mandated wage increases, low household sector leverage and high savings rates.

Domestic consumption still represents only about 38 percent of GDP compared to an

average of 58 percent in other global middle income economies and close to 70% in the

United States.

Part of the problem is that Chinese households save a much higher portion of their income as a precaution against illness, to further the education of their children or for retirement. To counteract this penchant to save, China needs to expand its social safety net for its population.

The forecast for household consumption growth in China is generally good. However, given the cyclical fragility of other sectors of the economy, robust household consumption growth is no longer optional but mandatory to sustain the high growth of the Chinese economy.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Emerging Market Strategies: Market Expansion

By M. Isi Eromosele

Increasingly, organizations are broadening the range of their quests in global emerging markets. Over seventy percent of global companies consider market expansion an imperative component in their growth strategies.

Global companies tend to establish operations in emerging markets to improve their time to market speed. A key part of this expansion strategy is the establishment of commercial operations as well as manufacturing enterprises in emerging markets.

Additionally, after-sales services, material sourcing as well as sales and marketing are becoming more prevalent.

Forward thinking companies need to understand that positive and sustained profits would be realized only when they implement global business models in emerging markets. There is a strong association between the number of enterprises a company establishes in emerging markets and the percentage of global profits they accrue from these economies.

Companies with five or more operations in emerging regions earn up to 25 percent of their profits from these enterprises compared to global firms that have only one operation, who derive only 8 percent of their profits from these regions.

There is one fundamental problem: global company investments on market expansion in emerging economies have not kept pace with the evolving capacity and capabilities of these regions.

Additionally, these have not been implemented with the underpinning of a global business model. As a result, performance of their investments in these countries pale in comparison to other regions of the world.

The following are new strategies global companies can implement for growth in global emerging markets:

• Rapidly expand local sales and service operations to manage growth
• Establish world-class manufacturing both in scale and scope to meet global demand more cost effectively
• Increase low cost workforce and enhance their skills to address talent shortage
• Leverage increasing talent and skills base to manufacture high end, more complex products cost effectively
• Build or acquire complimentary technology and assets to better compete with global giants in your market
• Build R & D capability to foster faster product development for local and global markets
• Diversify capabilities and capacity across multiple locations aligned with the strategic goals

It is imperative that companies shift specific functions of their value chains to account for new objectives relating to growth, innovation and sustainability.

As such, there are three success factors that influence the emerging market business model: capacity, capability and risk.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Emerging Market Strategies: Capacity

By M. Isi Eromosele

India and China continue to be pillars of global GDP growth. Companies are aggressively targeting these and other emerging economies to achieve their global growth targets.

However, doing business in developing countries is not an easy task. Doing so requires an in-depth understanding of the market, culture and local constraints.

Additionally, sufficient sales forces and support infrastructure would have to be put in place. These would facilitate the introduction of products in these new market regions.

As global companies continue to rapidly expand their business operations in emerging markets, they need to change their revenue models to tap into demand growth and compete with local emerging competition.

From a capacity perspective, companies do need to continue expanding their presence in the global emerging markets. Operations in emerging markets low cost centers allow companies to take advantage of favorable currency arbitrage and build capacity for local and international markets.

Global companies in big emerging markets such as Brazil, Russia, India and China (BRIC) need to expand both the scale and the scope of their production capacity. In the past several years, the demand for consumer and industrial products in the BRIC and other emerging market countries has risen greatly.

Consumers in these markets have consistently demonstrated a large demand for a wide range of products. As demand in emerging markets mirror those in the developed world, companies need to grow their capacities for product development, manufacturing and marketing to meet the need for increased local demand.

Customized price points will have to be developed for these key markets. High-end, established global companies should turn their facilities in emerging markets into export hubs through increasing manufacturing capacity to meet local and international consumer demands.

Talent shortage is a consistent challenge in emerging markets. General workforce abounds, but special skills are in short supply. Of the 90 million skilled workers in China, only 10 percent are specialized.

Global companies would need to develop specialty training programs for their emerging market workforce to bring them to global standard, facilitating the ability of these firms to increase their production as their markets demand.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Emerging Market Strategies: Location

By M. Isi Eromosele

Your emerging market strategy starts and perhaps ends with the decision of where to locate your enterprise. This crucial decision needs to be aligned with the strategy and not the target country’s ranking in world indicators.

To succeed in emerging markets, companies need to stay competitive and improve their products as well as speed to market. They must align their strategic objectives with their capabilities as well as the market potential of the country location that is to be chosen.

The emerging markets location options available to global companies who want to expand has widened in recent years. India and China had been the preferred venues for many years. They were the logical choice for low-complexity work. Although operating costs has been rising in these markets, their manufacturing capabilities have also been transformed for the better.

China has demonstrated its ability to leverage its ability in low-end manufacturing to become a major producer of sophisticated, high-end goods. Other countries such as India and Thailand are being chosen to expand high-end manufacturing operations.

As China’s growth in high-end manufacturing continues, supplier networks from surrounding countries are becoming centers for low-cost sourcing.

The above destinations are no longer the only options available for strategic global market expansion. Companies need to focus their global expansion plans on other emerging markets that better address specific challenges and complexities of the global market.

Companies seeking competitive advantages can find them in Eastern Europe, which boasts low cost labor, shorter lead times and attractive tax incentives to manufacturers. Likewise, Latin America, Russia and a host of Asian countries are emerging as attractive options for global market expansion.

Some high growth emerging economies offer considerable opportunities for revenue growth in their local markets. Many companies are establishing their business and manufacturing operations in markets such as Brazil and Russia.

Additionally, companies with manufacturing bases in these markets are establishing Research and Development units to develop and localize new market products.

Companies choose multiple locations for product development and manufacturing to reduce development time and access a wider pool of local talent. They diversify by spreading their investments across geographies.

As the number of plausible emerging markets grows, companies should give careful consideration to business success factors such as capability, capacity and risk. These factors can be crucial in choosing the right country in the right region.

Experience is another critical factor that comes into play when entering emerging markets. Companies with more experience tend to do a better job of extending their value chains in emerging markets because they have deeper business relationships and great knowledge of local markets and cultures.

Companies with less experience can still enter emerging markets by taking advantage of burgeoning market opportunities in the Eastern and Asian hemispheres.

Companies can also enter emerging markets to take advantage of newfound financial benefits. Many emerging countries are opening up to trading with the West, reducing tariffs, which in effect attracts greater volume of work from developed countries.

For example, Morocco established itself as an export gateway by entering a Free Trade Agreement with the United States, European Union and several other countries, including Tunisia, Egypt, Jordan and Turkey.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Emerging Markets: Building An Investment Case

By M. Isi Eromosele

Since the systematic risk in each country is the dominant factor in explaining returns, selecting and weighting countries is the most determinant of investment success in any diversified emerging market strategy.

While emerging countries may be quite risky on an individual basis, combining them in an equally weighted portfolio can significantly reduce the risk through the power of diversification that their low correlations provide.

Additionally, a broadly diversified approach that highlights the smaller of the emerging markets is an even more powerful return enhancer and risk reducer. One would need to think about the performance history of an equal weighted country approach comparative to a cap-weighted approach.

The investment case for highlighting smaller markets is strong (low valuations, higher growth rates, low correlations). An analysis of returns by market capitalization size reveals a powerful historical relationship between market size and performance.

This inverse market size effect is one primary driver for the excess performance of equal weighting vs. cap weighting countries. A more detailed look at the smallest of the emerging markets, sometimes called the frontier markets, strengthen the case for emphasizing smaller markets.

A moderate investment in these markets can offer the most compelling combination of growth and correlation (both cross correlation and correlation within the global market) because frontier markets in all regions - Africa, Middle East, Eastern Europe, Asia and Latin America - have projected earnings growth rates that are among the fastest in the world.

Indeed, both the reality and perception of risk in these countries are high. However, the influence of macro-economic improvements and effects of globalization are also high. Adequately structured long term, diversified allocated investments in these markets offer a solid portfolio packaged risks but good return benefits.

The performance benefits from disciplined rebalancing are evident as a direct consequence of high volatility and low correlations - two factors that are prominent in emerging markets. A structured approach that involves rebalancing to fixed weights can turn volatility into an asset in the chase for superior risk adjusted returns.

This is driven by the interface of volatility and correlation. The greater the volatility, the larger the dispersion between overperformers and underperformers, resulting in higher profits that is derived from timely rebalancing. The lower the correlation among assets, the more opportunities there are for rebalancing from an asset that has appreciated to one that has depreciated. Emerging markets, with both of these qualities, are magnificent candidates for securing this rebalancing premium.

It is undeniable that the economies of the world have become more linked and interdependent as sales and distribution channels have intensified in sophistication and accessibility.

These trends have resulted in security returns that are also linked and now move more in tandem with each other than was previously was the case. Correlations of emerging countries have increased, especially among the larger and middle-sized segments.

The smallest of the emerging market countries continue to show a relatively stable and persistently low level of correlation as their economies still remain somewhat independent of the world stage.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Rebirth Of Emerging Economies

By M. Isi Eromosele

The global economy is slowly expanding again. With leadership from Asia, emerging economies are further ahead on the road to economic recovery and thus leading the way in the global recovery. Emerging markets weathered the recent global financial crisis a lot better than the developed nations. This has helped boost their inflows and valuations.

The recent financial crisis was created when the developed economies led the world into a global downturn because of their excessive financial leverage. Emerging markets equities were impacted by this downturn in the fourth quarter of 2008 and trade financing and development funding evaporated. However, emerging market stocks bounced back much more strongly than stocks in developed countries, once credit markets began to heal.

Contrary to assumptions that emerging market equities would be most affected by the crisis, China and other major emerging economies turned out to be well positioned for the recovery with sound economic frameworks, well built-up currency reserves, low interest rates, lower that average inflation and improved terms of trade for commodity imports.

During the past decade, emerging markets have indeed experienced transformational structural financial reforms and better macroeconomic policies have been established. In response to global recessions in the 1980s and 1990s, many developing economies successfully revamped their economies, engendering budgetary surpluses, rather than deficits, built up considerable foreign exchange reserves, inaugurated effective Central Bank policies and achieved investment grade credit ratings.

There have been profound changes at the corporate levels as well. Companies in emerging markets have improved their balance sheets, implemented corporate governance reforms and improved the quality of their management, resulting in a more stable investment environment. While the above trends were taking hold in emerging markets, the same cannot be said for the developed markets and the emerging markets in Europe. The cause for this is excessive financial leverage and incredibly high budgetary deficits.

Emerging Asia, especially China is flush with robust liquidity, thanks to flexible monetary policies. Indeed, China has sufficient reserves to continue promulgating expansionary measures for the foreseeable future. Rebound in equity markets and the resumption of capital inflows within the context of a decline in risk aversion is providing further impetus for the Asian economies.

The global economy is expanding again, albeit slowly, being pulled up by strong economic performance of emerging countries and modest recovery among advanced economies. The International Monetary Fund (IMF) estimates that emerging markets will generate two-thirds of global Gross Domestic Product (GDP) growth in 2011 and it is forecasting GDP growth of approximately 1 per cent for the advanced economies versus 5 per cent for developing countries.

The long-term pillars of support for the emerging markets asset class remain the same, notwithstanding the recent financial crisis. The demographic profile of emerging markets remains favorable, urbanization continues unabated as the middle class is continually growing.

Additionally, personal consumption is still relatively low on a per-capital level, with considerable room for growth. Continued shift of population to urban centers portend requirement for a huge investment in much needed infrastructure, an area where some emerging economies, such as China, has stepped up spending.

The emerging economies face the challenge of providing their bludgeoning urban population with productive employment that would create incomes to help increase domestic consumption as well as produce tax revenues for the government. Fortunately, the major emerging economies are well positioned to support continued infrastructure investment as a result of their accumulation of significant foreign exchange reserves.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Long Term Investment In Emerging Markets

By M. Isi Eromosele

Profound structural changes in emerging countries during the past two decades have made them a key contributor to world economic growth. As a reflection of this transformation, the number of investment opportunities in terms of markets and companies listed has increased considerably. As a percentage of world market capitalization, emerging countries now account for more than 18 per cent, and this share is continually growing.

Portfolio flows into emerging markets have reflected the above trends as investors continue responding to both the increased opportunities and the strong relative investment returns of the past several years. The majority of emerging market flows has been directed to customary active investment methods - methods that rely on in-depth research of countries in order to identify tactical or short term opportunities. Since these are some of the world’s most volatile equity markets, quality research should be conducted that would create information advantages and enhance performance.

A long-term commitment to the emerging markets via a third investment strategy is needed: a disciplined rules-based or structured approach. Such an approach will result in a sustentative improvement overall, and serve as a compliment to both conventionally active and passive strategies. The equity markets of developing countries are exceptionally well suited to structured portfolio management. This approach to asset management incorporates ideas such as equal weighting, systematic re-balancing and diversified economic sector and stock allocations within countries.

Risks and Rewards

Opportunities

Higher Growth Rates: For a long period of time, emerging markets have continually achieved higher long-term economic growth rates than those of the developed world. The BRIC countries (Brazil | Russia | India | China) have seen their GDPs substantially rise as a percentage of the world’s. Looking forward, it is predicted that by 2050, 7 of the top 10 world economies would be in countries that are currently in emerging markets today. The success of the past several years and the growth tangent projected for the economies of these countries is soundly supported by substantial improvements in key economic metrics such as inflation, fiscal policies, robust foreign exchange reserves and net direct investments.

Low Valuations: An additional incentive to the return potential of emerging markets is the relative cheapness in terms of evaluation basis. While trailing price to earnings ratios in the United States are between 17 and 18, developing countries as a whole show a ratio between 14 and 19, excluding the recent boom in Asian emerging economies, this can be lowered to between 14 and 16. There is also sufficient evidence that supports an emphasis on the smaller vs. larger emerging markets within a diversified portfolio - p/e ratios are lower, historical returns have been higher.

Low Correlations: Emerging markets offer meaningful diversification to a global portfolio due to their relative low correlations to other emerging markets and the markets of developed countries.

Risks

Political and economic shocks should be anticipated, but are difficult to predict. In 2007, investors dealt with dramatic volatility in China when on two occasions, the Shanghai stock market dropped by 8.84 per cent and 8.26 per cent respectively. Despite these two large single day sell-offs, the same index ended 2007 up over 96 per cent. Despite this type of challenges, emerging markets offer a multiple of investment opportunities.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Emerging Markets: Changing Global Finance

By M. Isi Eromosele

Rapidly developing economies (RDEs) have become drivers of change in the global financial markets. Other new players have surfaced from the emerging economies, including sovereign wealth funds, government controlled entities and acquisition minded corporations. A major implication is that as these entities strengthen their foreign exchange coffers, they will look beyond their borders to make acquisitions and perhaps take controlling interests in foreign companies.

The build-up of foreign reserves by these rapidly developing economies was achieved through the establishment of export-led economic policies, particularly in Asia. Many of them made a transition from onerous based economic systems to more deregulated, market-oriented economies. Their success helped create enormous trade surpluses, often coupled with high savings and investment rates. These trade surpluses are expected to keep growing strongly in the foreseeable future. Another contributing factor to the wealth of these emerging nations has been the tremendous rise in price for commodity items they sell, mainly to the developed world. They have reaped a great financial windfall due to this massive increase in commodity prices.

The wealth of the emerging nations has resulted in a huge increase in global liquidity and has helped moderate world interest rates as well as finance a very large U.S. trade deficit. This is the converse side of what is called a global financial imbalance, with the world richest country borrowing from poorer nations.

Realigning Capital Inflows

In order to finance the twin deficits (trade and budget), the U.S. has had to issue relatively low yielding Treasury securities. The Chinese and others are not pleased with the interest rates on the Treasury bonds and are seeking higher returns. New money from emerging nations is seeking outward investments through mergers and acquisitions, among other strategic stakes. The most visible of this realignment of capital flow came in 2008, when major Wall Street companies sought offshore money, largely sovereign funds for bailouts from the severe credit crunch resulting from the U.S. subprime mortgage crisis. Investors from China, Singapore and oil producing countries from the Middle East injected about $70 billion into Merrill Lynch, Citicorp, UBS, Morgan Stanley, Credit Suisse and other major institutions.

Investment From Sovereign Funds

In 2008, sovereign funds totaled $2.5 trillion. Today, that amount is almost doubled, surpassing the forex reserves of many developed nations’ Central Banks. Sovereign funds investments in the United States enjoy an advantage in that as government held investors, they are exempt from paying taxes. With such a tremendous amount of funds under their management, sovereign funds are becoming a colossus in the global investment market.

While sovereign funds insist they are simply passive investors who are only seeking the best returns from their investments, there are still some concerns from many quarters, including the European Commission, the IMF and other financial organizations as well as developed nations’ governments about the influence being exerted by these funds on the global financial markets. Others view sovereign funds as important sources for much needed capital that offer corporations new opportunities in financing sources. As such, it is expected that there will be more partnerships between major Western companies and sovereign funds. The funds are great partners for financing of large global projects.

Looking ahead, companies in the developed nations need to recognize that their shares will be primarily owned by foreign investors. There is nothing they can or should do about that. Instead, they should consider these investments as great opportunities. The momentum in global finance is shifting quickly in favor of emerging nations and will continue to do so in the foreseeable future. Meanwhile, expect sovereign funds and cash flushed companies from emerging markets to continue exerting much influence in the global financial markets.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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The Growing Influence Of Emerging Markets

By M. Isi Eromosele

While the market performance of emerging market countries have been affected by the fiscal and economic crisis buffeting the United States and Europe, we at Oseme Consulting believe that emerging markets will surface strongly from this downturn and continue to lead the recovery in the global economy. This assertion is due to their sound macroeconomic fundamentals and growth. After the global economy fully recovers, we expect the correlations between the emerging and developed markets to finally drop.

Better Positioning For Strong Recovery

Many emerging markets have made strong gains in diversifying their economic exposure so as not entirely depend on the United States as the only market for their exports. As such, while exports to the United States from these emerging countries have dropped since 2008, their exports to other emerging countries have increased. As a case in point, half of China’s exports now go to emerging economies and South Korea’s total exports to emerging countries have risen, even as its exports to the United States have dropped by as much as 20 percent during the past 24 months.

Many emerging markets, especially in Asia, have used the boom of previous years to improve their fiscal position, building up record reserves and fiscal surpluses. The improved positions of these countries have given them the flexibility to respond aggressively to the economic slowdown and many countries have initiated significant, sophisticated measures. China, for example, is in the process of implementing a package, representing 10 percent of its GDP, consisting of extensive tax breaks, government subsidies and increased spending on infrastructure. Most emerging marketing countries, including China, India and Korea, have cut interest rates in an effort to stimulate their economies.

However, not all emerging countries have made improvements. Turkey, for example, is running a sizable current account deficit and has large foreign debt.

A Diversified Emerging Market Strategy

In recent years, the correlations between emerging and developed markets have slowly increased as a result of economic integration and a trend toward institutional investors reducing their home country bias as they seek diversified international investment portfolios. The global financial crisis magnifies the pressure and correlations between the two markets have risen significantly in the short term. Despite all these trends, emerging market correlations remain lower than those between developed nations. Investors interested in broadening their exposure may further diversify their portfolios with allocations to emerging small cap and frontier markets.

While emerging market companies such as Samsung are highly integrated with global equity markets and global business cycles, smaller emerging market companies are affected more by local and regional factors and can offer valuable diversification benefits. Also, small companies have historically led the way out of recessions, so they were the first to rebound.

Emerging Markets Potential

At Oseme Consulting, we continue to advocate additional allocation to emerging markets, due to their long-term diversification benefits, high growth potential and improving macro-economic fundamentals. Emerging markets have matured significantly in recent years and are no longer the source of economic contagion. In fact, many emerging markets, with their positive trade balances and substantial reserves are better positioned to weather the financial crisis than some developed markets, even as they continue to lead the global economic recovery.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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Emerging Market Strategies: Operating Model

By M. Isi Eromosele

The global formation of International Joint Ventures (IJVs) has consistently increased steadily in recent years, especially among emerging markets in Asia, Eastern Europe and Latin America. These particular emerging markets account for about 70 percent of all IJV agreements consummated by multi-national companies. As companies deepen their business activities in low cost emerging markets centers and seek to integrate them into their global value chains, the chances are that their existing global operating models may not mesh well with and be effective in emerging markets. A major strategic realignment is usually necessary to make this integration work.

The type of business activities, market opportunities, country regulations, tax advantages and experience in emerging markets are the key determinants of the operating model for emerging markets. One third of global companies currently use wholly owned subsidiaries in emerging markets as joint venture partners. As complete product lines are being built and new products developed with their joint venture partners, global companies need to maintain a considerable level of control over strategic business activities.

In the same context, companies expanding sales activities in emerging markets need access to deeper knowledge of local customers, support networks, distribution and advertising. Companies need to implement joint venture partnerships with experienced players in the local market.

Market opportunities also drive the choice of operating models in emerging markets. Multi-national companies who struggle to stay competitive and innovative can find local emerging market companies with a new line of products that has the potential to add significant cash flow. In such cases, the choice of operating model depends on size of investment, risk appetite, competition and expected return on investment. Companies should choose between joint ventures and acquisitions after thorough due diligence, depending on how these factors play out.

Country regulations and experience in specific countries can also drive decisions about operating models. The type of operating models varies significantly by country. In new and smaller emerging markets like Czech Republic and Mexico, companies would be better off with wholly owned subsidiaries compared to China and India. Many countries have strict regulations on operating models for foreign direct investments to support protectionism and growth of domestic industries. However, as many countries commit themselves to open market policies, these regulations are loosening.

As companies become economically stronger, they tend to ease such regulations on operating models. However, to stay competitive over the long term, wholly owned subsidiaries might not be the best option for building an understanding of local markets. Companies with more experience in emerging markets tend to choose wholly owned subsidiaries to expand their presence.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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