Investment Research – Creating On-the-ground Presence in Emerging Markets

Published on January 29, 2018 by Ramesh Punugu

Emerging markets present a sizable opportunity to global investors to create alpha. According to the MSCI, the MSCI Emerging Markets Index had market capitalization of over USD5.4tn as on December 29, 2017. Recent stock performance in emerging markets has been stronger than in more mature developed markets. Further, emerging market indices substantially outperformed their developed market counterparts in 2017. The MSCI Emerging Markets Index returned over 37% in 2017, much higher than the MSCI World Index’s 22.4%. With forward PE of 12.5x for the MSCI Emerging Markets Index versus 17x for the MSCI World Index, there is potential for the outperformance to continue in 2018, as companies in these regions benefit from a strong cyclical global recovery

While the long-term potential of emerging markets equities is well understood by global investors, they face several operational challenges in investing in these markets in a sustainable manner.

Lack of on-the-ground presence: Many global investors investing in emerging markets have the bulk of their investment teams based out of distant global financial centers. The lack of dedicated research resources to effectively cover these markets impacts their ability to effectively invest in these markets.

Limited and expensive investment research talent: While emerging markets represent a large investment opportunity, high-quality investment research talent in these markets is limited. Moreover, significant expenditure is incurred in attracting, training, and retaining them over market cycles

Limited sell-side-research coverage: The extent of sell-side-research coverage on emerging markets by bulge bracket investment banks is limited. In fact, it is shrinking, as such research is no longer seen as remunerative. Over the last few years, several sell-side research firms exited their cash equities business in the region. While local sell-side firms offer research coverage (especially for larger market capitalization companies), the quality of research is patchy at best.

Language issues to effectively cover these markets: Investors in these markets face language issues, as financial reporting by companies and news coverage in these markets are in local languages. This makes it difficult for a non-native analyst to stay abreast of these markets.

Forward looking global investors are increasingly leveraging MA Knowledge Services to effectively cover stocks in emerging markets. For such investors, MA Knowledge Services creates dedicated teams of analysts (MBAs, Accountants, and CFAs) at its delivery centers in Beijing (China), San José (Costa Rica), and South Asia (Bangalore and Gurgaon in India and Colombo in Sri Lanka), who help cover these markets in a sustainable manner.

For example, a large US-based asset manager uses a team of four analysts with strong Mandarin skills based out of MA Knowledge Services’ Beijing delivery center to carry out financial modeling and valuation, conduct background research on companies, gather primary and secondary data, and coordinate company visits. Similarly, a Europe-headquartered asset manager leverages a team of three analysts with strong Spanish and Portuguese language skills based out of MA Knowledge Services’ Costa Rica delivery center to cover Latam markets. These analysts work as an extension of the client’s investment teams covering companies, sectors, and regions in this market. Output produced by an MA Knowledge Services team is customized for each client and available exclusively for its use. This provides a unique edge to a global investor that is sustainable.

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