BALANCING THE BOOKS
The Emerging Markets' Time Has Arrived
Two new books underscore their remarkable gains and enormously bright prospects
Edited by JAY PALMER
Reviewed by James M. Bogin
WE LIVE IN THE AGE OF EMERGING MARKETS. Not only have China and India taken huge strides, but Brazil, Korea, Mexico, South Africa and many other countries are now home to huge, world-class companies. In another 50 years, the economies of today's emerging markets will eclipse those of the developed world in size. As Antoine van Agtmael suggests in his excellent new book The Emerging Markets Century, you only need to board an airplane in the modern, well-ordered airports of Seoul, Shanghai or Singapore and land in the chaos of snaking immigration lines, confusion and intrusive construction at New York's JFK to recognize the challenge these dynamic new economies pose for established powers.
Van Agtmael's is one of two interesting new books -- his will be out in January of 2007 and the other is already available -- that focus on investing in a rapidly changing world. The second is from David Riedel, one-time equity analyst for Salomon Smith Barney (now a part of Citigroup) in Bangkok and New York who has written Finding the Hot Spots: 10 Strategies for Global Investing. Riedel advises investors on how to develop ideas and assemble a portfolio that reflects the new global economy.
Almost 30 years ago, van Agtmael invented the catch phrase "emerging markets" as a more palatable alternative to Third World, while launching a fund for the International Finance Corp., part of the World Bank. Today, he manages billions of dollars for his own investment firm, Emerging Markets Management.
The Emerging Markets Century (subtitled How a New Breed of World-Class Companies is Overtaking the World) is very readable and loaded with ideas that may find their greatest appeal among market pros. Van Agtmael eloquently describes how 25 companies in less-developed nations overcame geographical, political and economic challenges to become major world players. He offers a well-thought-out list of investment pros and cons, as well as the lessons learned from each company. Investors, professional or otherwise, can benefit from both the insights and the knowledge offered about these emerging blue-chips.
Van Agtmael argues that -- contrary to popular belief -- corporate success in emerging markets isn't derived solely from cheap labor or proximity to a natural resource. Many of the executives he interviews worked at and studied foreign companies, applied this knowledge at home and ultimately outfoxed their global rivals.
Carlos Aguiar, CEO of Brazilian pulp company Aracruz, told van Agtmael: "When I went to Finland for the first time, I was shocked to find they could run a mill with 400 people when we had 1,200. I told our managers we had to do the same, but nobody believed me." He dispatched a group of his engineers to Finland to search for ways to achieve similar productivity levels. Today Aracruz is one of the world's lowest-cost producers of bleached eucalyptus pulp, and its 30% return on equity is at the top of the charts.
Aracruz's success underscores just how much global economics has changed in the past 70 years. Before World War II, European and American companies set up factories in emerging markets and brought in their own people and parts. Later, multinationals realized that parts could be produced overseas and that local staff could do the jobs better and cheaper than expatriates. Later still, these employees designed the parts, too. Fifteen years ago, no one outsourced chip design to China. Now, it's taken for granted.
Riedel's Finding the Hot Spots offers a different perspective on these and other overseas markets. Have you ever come across an interesting fact, say that Brazil sells lots of commodities to China, and wondered how you might turn that information into a profitable stock investment? Or thought for a moment about which Japanese shares will do best as the country continues its gradual recovery?