The Illusion of a Global Investment Risk

Generally, I rarely watch business news TV shows in America. They report risk and opportunities around the world from very limited and deceptive perspectives. They create an impression that because Ghana, South Africa, Brazil are developing or emerging economies, their risk profiles are more that what you have in US and Europe.

 

Simply, business journalists fail to decouple the same mindset that the general media used to portray the developing world. It is unsafe, poor, risky to travel, terribly bad governance and nothing good about those nations. The business journalists based on those assumptions declare that if those nations are that bad, there is no hope of opportunities therein. They are classified as risk-prone and investors are advised to avoid them.

 

Unfortunately, that is not the reality. The developing world of today is unique. The institutions may be weak, but the opportunities are enormous. Forget the Argentine hyperinflation; forget the SAP program in Nigeria; forget the Mexican peso bailout; forget the contagion of currency devaluation of late 1990s in Asia; just forget those images of developing world.

 

They have since evolved. There is a new world and those business TV news, which are usually not thoroughly researched are missing lots of points. The truth is that a typical business anchor will not call some bad bets in the developed world because it seems abnormal. And many fund managers lack the boldness to tell their customers that the developed world is not that bad.

 

When they seek new funds, they still concentrate in Europe and US; rarely putting lots of capital in the emerging markets and developing world. Why not? That is the normal and any change means the fund manager is not thinking straight.

 

For me, while the developing world is risky, their risk-influence cannot affect the world that much. If Ghana gets into sovereign debt problem or have series of corporate debts, it will be like a cup of water in an ocean. They have risks, but its influence is still limited internationally.

 

But think of the so called developed nations. In the last five years, all the global economic problems have come from these ultra advanced countries. The Great Recession did not start from Argentina, it started from the US. And the new one that is holding the recovery is not from those developing nations. Right there at Europe, the PIIGS are the issues. From Greece to Spain, the world has to face difficult hurdles in the recovery.

 

The irony of this developed and developing world classification is that the problems of the former are global and catastrophic. Recent events show that they are not that safe. Iceland is not a safer place to do business than Ghana; but business TV shows will make it look better because Iceland is projected in the mainstream media as heaven.

 

Over the years, the world has seen the developing world from a mirror and that continues to affect investors. The global risks are right in the developed world because they are the people piling all the debts with their social services and welfare governments. Governments drive consumerism and consumption in developed world and pile debts doing those. In developing nations like China and Brazil, when governments spend, it is not usually on welfare, but real investment on infrastructures.

 

Developing world is most cases are conservative and I mean the BRIC countries which are better managed than many others. They have evolved over years of experiences and they control how much money they spend. Unlike Greece, they rarely finance unnecessary welfare system. They are conservative in actions and serious and in risk dictionary are much safer.

 

The rating agency will put South Africa and Botswana on the same scale as Greece for many factors that have nothing to do with economics. Traditionally, it makes it difficult for the nations to borrow at low interests with their bonds not been attractive. But if you walk the numbers, fact-by-fact, you will notice that the economy of South Africa is far healthier than Greece and its bond rating should be better.

 

Standard & Poor’s has anticipated lowering the credit ratings of many countries including Botswana, South Africa and Ghana within a year. South Africa has a rating of BBB+, the rating of Greece as of February of 2010. The rating agencies rate the emerging market bonds so low that investors think they are very toxic compared with the developed ones. It remains strange that South Africa has the same rating and risk profile with Greece, despite all the problems of Greece. It is simply bias and it shows the problems of the science of rating. Perception, instead of data, affects these ratings.

 

Investors buy that ideology, thinking the risk is in the developed world. Unfortunately, the problem is in advanced ones which have sovereign debts issues. Many are getting broke; yet, they have better ratings on their bonds. When fund managers allocate funds, you will notice that some will put low-risk funds in Spain bonds over Brazil though Spain is debt-ridden.

 

Consistently, you watch on TV how China, Brazil, and Russia will go through bubble or bust either through the real estate, banking or otherwise. But when places like Ireland and Portugal show their faces as places that can actually bust, people get surprised. The rating agencies have shown lack of abilities to objectively assign ratings because they are carried by emotions based on perceptions of the population of the developed world.

 

It does not make sense to rate South African bond riskier than Spain’s. Likewise, if you put Ireland at higher risk that Russia, you can lose clients. I struggle to understand why a bank like Standard Chartered Bank that operates internationally will be considered to be taking more risks in Nigeria than in US. In Nigeria, a bank can only fail due to lack of due diligence on making loans and only those that can pay loans get loans. Only rich people have access to bank loans in many parts of Africa. And they have collaterals to secure them.

 

In US, anyone can get loans through credit cards and mortgage without collaterals. And possibly they can default. In most developing world, banks do not finance mortgage. They collect deposits and customers pay them to keep their money. In most parts of West Africa, banks charge COT (commission on turnover) which is a special fee charged to current account customers for withdrawing their money. It is purely legal. You can lose $3 for every $100 withdrawn under this practice.

 

Compared that with US where banks actually pay customers to keep their money through many promotions. They do this because the industry is saturated and have the pressure to raise their deposit level. In developing nations, banks even turn away customers because the competition is not that severe. In general, many banks there can collapse only because of poor governance culture, and not competition. When a well managed international bank gets there, they always do well and their risk must be evaluated accordingly. They face lesser risk in developing world than developed one.

 

In conclusion, it is time people begin to understand that the world has since transformed. Risk as we have thought has changed. The bonds from developed world are not that safer from many from the BRIC nations. Yet perceptions on how the advanced countries have thought about these nations continue to undermine the abilities of investors to understand the new normal. While many developing markets are lifting the balance sheets of many MNCs, many fund managers still think they are risk-prone entities. No, this illusion should stop because the major risks are in Wall Street and Euro-zone.

 

 

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