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17/08/20
Emerging Markets: Pathways To Continued Investment Opportunities
An emerging market economy is defined as an economy of a developing nation that, as it grows and develops, seeks greater engagement with global markets. While emerging markets may share some – but not all – of the characteristics of their larger, more developed counterparts, it is expected that as they transition from their lesser developed states, their focus will be on key indicators like increased trade volumes, foreign direct investment, levels of liquidity in the local equity and debt markets, and the modernisation of domestic regulations governing the operations of regulatory and other financial institutions.
Over the last two decades, the most notable emerging markets experiencing rapid growth were Brazil, Russia, India, and China – now known affectionately as the ‘BRIC’ countries. South Africa was later added to this illustrious group, necessitating the simple expansion of the acronym to the ‘BRICS’ countries to reflect its addition. In 2001, Jim O’Neill, then Head of Global Economic Research for Goldman Sachs and the original cited coiner of the BRIC acronym, projected that by 2050, the original four nations would be the fastest growing economies in the world. Their projected growth was based on the lower labour and production costs in these respective countries, with Brazil and Russia in particular expected to become dominant players in the supply of raw materials while India and China were expected to dominate the global supply of manufactured goods and services.
Other countries have since showed promise, including those in Southeast Asia, the Middle East, and North Africa. Their attraction lies in their large populations and relatively stable economies - key factors for international investors looking to diversify their investment portfolios. To put into context, the US, inarguably the largest economy in the world, experienced real gross domestic product (GDP) growth of 244 per cent between 1990 (US$5.963 trillion) and 2018 (US$20.54 trillion). In contrast, China’s economy saw real GDP growth of 3671 per cent for the same period under examination, rising from US$0.3609 trillion in 1990 to US$13.61 trillion in 2018[i].
There are several compelling reasons to invest in emerging markets. However, investors and businesses alike should be mindful of the potential risks, including the political, economic, cultural, and currency challenges which may be endemic to a jurisdiction. Some emerging markets are characterised by unstable and sometimes volatile governments, questionable monetary policies, and underdeveloped markets. They may also lack in the labour and raw materials levels to sustain certain activities, or face high inflation or deflation, with currency valuations that are significantly out of par from their historic domestic levels or the average price level from a basket of leading currencies from around the world.
Rapid growth opportunities, however, are the primary drivers behind investment considerations in emerging markets. International investors, therefore, pay keen attention to these markets in order to take advantage of any prospects for diversifying their investment portfolios. Simply put, strategic investing in emerging markets can be a welcome addition to holistic investment planning. Additionally, companies can benefit even further by doing business directly in emerging markets. If approached correctly, companies are afforded certain first-mover advantages that can contribute towards early success through the fostering of local partnerships for gaining significant brand recognition. This also lends to the strategic enhancement of a company's operational focus, including the extension, for example, of the life cycle of existing brands that are nearing maturity in one’s domestic market but could be wholly rejuvenated through expanding production/distribution into to these newer markets.
When considering moves into emerging markets, businesses often consider the access to new capital as a major mitigating factor for any risks associated with new markets. Often, access to capital domestically is maxed out or may have onerous conditions attached to its access and use. Emerging market economies, in contrast, provide an untapped source of often affordable capital as many governments incentivise foreign direct investment through an offering combination of low taxation and grants in exchange for the transfer of skills through employment and new technologies. Further, capital can also be raised from members of the growing upper- and middle-class populations in emerging markets that have been accumulating wealth as businesses grow and expand alongside these economies. While much of the demand for new products and services comes from persons within these societal strata, they too seek out opportunities through which they can invest and further their wealth creation objectives.
As globalisation has progressed, low tax jurisdictions and the incentivising of foreign investment have come under greater scrutiny. The global economy now demands greater accountability, transparency, and the application of good governance principles in all forms of business to promote a fair and balanced global market space. To this end, many emerging market governments have sought to modernise and harmonise their regulatory frameworks and monetary policies in line with those of many developed markets, improving information exchange and adopting similar best practices in accordance with guidelines issued by various global monitoring agencies.
A Case For Barbados As The Emerging Market Of Choice
Within the Caribbean and Latin American (LATAM) basin, it has been the countries in the latter region that have been the recipients of much notoriety related to their potential as emerging markets. While Brazil is most popular, countries like Mexico, Argentina, Chile, and Ecuador have also been experiencing economic growth. Guyana, the former British colony situated on the northern coast of South America but considered a Caribbean nation, and Suriname have both recently entered the fray with the discovery of large offshore deposits of oil in their respective territorial waters.
While many of the LATAM countries have been experiencing growth, recent events have transformed some of the investment incentives into risks which may impede future economic growth. Many LATAM nations rely on China as a major trade partner serving as the destination of choice for their exports. Brazil, Chile, Peru, and Uruguay all rely heavily on the Chinese market and thus, any economic downturn in the Chinese economy or a re-escalation of the trade war between China and the US will negatively impact the growth potential of these LATAM nations. Mexico could suffer similarly due to its reliance on the US and any variances in its economic activity.
Unlike their LATAM counterparts, countries of the Caribbean are reliant on larger markets for entirely different reasons as many of them depend on tourism and the exportation of professional services to larger markets. Natural disasters – primarily hurricanes and earthquakes – tend to be the largest threats to most Caribbean nations.
Barbados is regarded as one the Caribbean’s most established jurisdictions for tourism and business. The combination of its historic renown as a stable, modern, treaty based, and cost-effective jurisdiction is paired with a perennial focus on operating strategically as the International Business Hub of Choice in the Western Hemisphere. For the avoidance of doubt, Barbados is ranked 56th out of 189 countries on the United Nation’s 2018 Human Development Index (HDI) - an extraordinary ranking for a country of its size[ii]. With a population just shy of 300,000 individuals, 81.8 per cent of persons on island have access to the internet. The island boasts a literacy rate of 99.6 per cent for persons over the age of 15 and all its citizens have access to quality healthcare.
The Barbados treaty network of 40 double taxation agreements (DTAs), nine bilateral investment treaties (BITs) and five tax information exchange agreements (TIEAs) is unmatched in scale and scope in the Caribbean. For the global business community, this is particularly attractive: use of a Barbadian corporate vehicle grants tax efficient investment protection when conducting business in a treaty partner jurisdiction. Operating from Barbados can result in a quality of life uptick without sacrificing business efficacy. The operational freedom to serve both local and international clients – together with the convergence of domestic and global tax rates – are key features that position Barbados as a truly competitive and compliant jurisdiction to do business.
Foreign direct investment is of paramount importance to Barbados and drives economic activity in the construction, distribution, finance, and general services sectors. Barbados is ranked among the top 10 captive insurance domiciles in the world and is the fourth largest recipient of Canadian direct investment (abroad) after the United States, the United Kingdom, and Luxembourg. For investors, the ubiquity of Commonwealth legal features is attractive: Barbados’ well-developed legal system is derived from English Common Law and Statutes and Barbados’ modern corporate law is modelled on the Canada Business Corporations Act. Barbados is also a signatory to the OECD’s MLI, further reinforcing Barbados’ longstanding commitment to international standards.
A Case For The International Securities Market Of The Barbados Stock Exchange Inc.
International best practice and a cost-effective structure, together with the backdrop of Barbados’ comprehensive tax and investment treaty network, combine to position the Barbados Stock Exchange’s (BSE’s) International Securities Market (ISM) as the global exchange of the future in the Western Hemisphere.
The ISM is a global market exchange operated by the BSE – designated as a Recognised Stock Exchange by Her Majesty’s Revenue & Customs (HMRC) in the United Kingdom – from the heart of the Caribbean. With a unique investor pool that combines both regional and international securities trading, the ISM offers a dynamic market for companies looking to raise capital and improve visibility. By virtue of its domiciliation in Barbados, the ISM is complemented domestically by internationally recognised law firms, Big 4 accounting firms, chartered banks, and trust companies that have supported subsidiaries of several leading international corporations for over 25 years. Corporate service providers in Barbados are internationally certified, well-educated, and well-travelled - appreciable features that ensure continuity in the levels of technical, administrative, and professional support that international companies expect.
The combination of right sized regulation, quality service providers, a cost effective and tax efficient market structure, and Barbados’ world class reputation coalesce to position the ISM as an ideal market for the future’s most innovative and forward-thinking companies.
Footnotes:
[i] Source: World Bank, as of 12/31/18
[ii] Source UNDP Human Development Reports - http://hdr.undp.org/en/countries/profiles/BRB
Barry Blenman, MSc
Barry Blenman joined the Barbados Stock Exchange Inc. on February 2, 2009 in the post of Registry Services Assistant. At the time, his primary role was the management of Sagicor Financial Corporation Limited’s share register and the preparation of the BSE’s daily trading reports. On September 2, 2010, he was promoted to his current post of Operations Supervisor – Business Development reporting directly to the Managing Director.
Mr. Blenman acts as liaison for external partners and internal groups with the key responsibility of identifying, negotiating and managing relationships with partners whose objectives and product/service offerings complement both the short and long-term vision of the Barbados Stock Exchange Inc. He still retains his reporting duties – researching, preparing and disseminating all market related information on behalf of the BSE, the coordination of all outreach programmes including conferences and seminars and all communications with various media outlets both local and international.
Mr. Blenman has worked in the international business and financial services sector, the local manufacturing sector and the Civil Service. He holds a Master of Science Degree in Project Management, a Bachelor of Sciences Degree in Management (Upper Second-Class Honours) from the University of West Indies – Cave Hill as well as Associate Degrees in both Mechanical and Electrical Engineering.
Terry Belgrave
Terry Belgrave is a financially-trained, development-focused professional with over a decade of experience in business development roles. He is a graduate of Western University in Canada where he paired a Bachelor’s Degree in Management and Organizational Studies (B.MOS) – Finance Specialization with an additional Minor in Economics. His track record of success, ultimately, is derived from the combination of his specific educational background and industry-agnostic corporate experience – a coalescence that established critical thinking for operating effectively through the intersection of human psychology, the capital markets and government policy.
Marlon E. Yarde
Marlon E. Yarde has been with the Barbados Stock Exchange Group since November 1, 2003. The Group includes the parent, Barbados Stock Inc (BSE) its subsidiary, the Barbados Central Securities Depository Inc. (BCSDI) and the subsidiary of the BCSDI, the BCSDI Custodian Trust Services Inc. (BCTSI). He currently holds the position of Managing Director and CEO within the Group.
Mr. Yarde has played a leadership role in the significant developments within the BSE over his eighteen plus years tenure, including the BSE’s demutualization and the launch of the International Securities Market.
Mr. Yarde, a Chartered Accountant with his professional qualifications being a Fellow of the Chartered Professional Accountants Association of Canada and a Fellow of the Institute of Chartered Accountants of Barbados.
He is also a Chartered Governance Professional and Chartered Secretary holding a Fellowship designation from the Chartered Governance Institute given in London.
In addition, Mr. Yarde holds a Bachelor of Laws Degree from the University of Huddersfield in the UK and a Master of Laws Degree, specializing in Securities Law from Osgoode Hall Law School of York University in Toronto, Canada.
Mr. Yarde is a keen support of and advocate for excellent corporate governance practice in Barbados and the wider Caribbean.
