Burton Malkiel, author of the investment classic, A Random Walk down Wall Street (W.W. Norton), joins a chorus citing emerging markets as the best place to invest over the next decade.
Time — with the hailed Princeton University economics professor’s backing — to listen?
Granted, last year might have marked a better time. The MSCI Emerging Market Index closed 2011 down 20.6 percent. This year, so far, it’s up more than 16 percent. Leading countries in the MSCI Emerging Markets index, by the way, are China, South Korea, Brazil, Taiwan and South Africa.
Malkiel, recently in The Wall Street Journal, cited both stocks and bonds as great investments for emerging markets. Reasons: Low debt ratios, favorable demographics because of younger populations and large labor forces.
Legal systems must be revamped
But, be prepared for many problems if you invest in emerging markets. You definitely don’t want to bet the ranch on them. And you want to stick with information from respected independent research firms. Don’t rely on government data, suggests William B. Gamble, a consultant, international lawyer and author of Emerging Markets: Rules of the Game (Apress).
“It is a joke,” Gamble contends. “The state controls the economic and accounting data that is released. Employees cook the books.”
Before emerging markets become a viable place to invest, legal systems must be revamped, Gamble says. Right now, there often is little rule of law. Whether companies can raise capital or positively resolve disputes depends upon relationships — not a free market or unbiased legal system. Often just a few companies dominate emerging market countries and the success of private enterprises depends upon whom they know.
Bad behaviors in China, Korea
Contrary to what many say, China could well be one of the worst places to invest, Gamble believes. He cites piracy of software, lack of a legal infrastructure and no free press.
Don’t believe the annual 8.9 percent economic growth quoted by China for 2011, he warns. Empty buildings are all over. Even U.S. multinationals that invest in China are risky. That’s because after U.S. companies open operations in China, profitable state monopolies, run by a small number of government officials, start competing on an uneven playing field.
Even in South Korea, relationships control the economy, Gamble says. The country’s dominant export sector activity is dominated by several dozen large family-owned corporate groups.
“The heads of these (families) have a long history of behaving badly,” he says. “Lee Kun-hee, chairman of Samsung Electronics and South Korea’s richest man, was convicted of tax evasion, but the conviction was expunged. South Korea’s president, Lee Myung-bak, recently pardoned 74 top executives.”
Russia and China have not entirely shaken their Communist pasts, he says. Thus, beware that all aspects of business and investments can be changed at any time.
Gamble acknowledges that India has some first-rate, world-class companies that meet international standards, especially in software technology. “Companies like Wipro and Infosys compare favorably with their competitors in the United States,” he says.
Direct investment in India also has been successful. Gamble notes that Vodaphone Group Plc, a British-based mobile telecommunications company, is running a profitable operation in India.
Nevertheless, serious problems with India’s form of capitalism remain.