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October 24, 2003 8:23 AM   Subscribe

Ranking Emerging Markets by "Market Potential" Michigan State Univ ranks emerging markets by their market potential. Does this mean that all new investment should go to Hong Kong and Singapore? Anyone willing to sink major $ in country #6- Hungary?
posted by SandeepKrishnamurthy (29 comments total)
 
Ah, the emerging market. One theory on the invasion and takeover of Iraq by the United States is there was a build up of capital within the US. Invading Iraq created a channel by which an enormous amount of aggrandized investments could be routed.
More on point, most of my recent investments have gone through Shanghai.
posted by the fire you left me at 8:35 AM on October 24, 2003


I prefer the capital theory of the war to the emerging market theory, myself. With Russia's recent move to price oil in euros, the dollar faced a potentially destabilizing plunge as the artificial floor below overseas demand for the dollar weakened. The US had to secure Iraqi oil reserves in order to protect the dollar's hegemony in the capital markets. This also has the benefit of explaining European reluctance to back the war, as they would prefer to see oil priced in euros as well, strengthening their own currency vis a vis the dollar.
posted by monju_bosatsu at 8:47 AM on October 24, 2003


Didn't Germany throw a lot of money into Hungary back in the 90s?

Sorry for the poor link, gotta get back to pimpin for the man.
posted by infowar at 8:49 AM on October 24, 2003


Trying to address Sandeep's question, rather than Iraqfilter issues: I believe investors tend to specialise in particular market sectors, some might have more of an interest in, for example, electricity infrastructure. These people will not invest in such infrastructure in Hong Kong until the opportunity is used up, and then switch over to spoon manufacture. Instead once they have used up the best opportunity in HK they will look where they might best gain advantage in their sector in other nations. Opportunities in some sectors will not apply in some countries. This is only part of the picture, things like comparative advantage will also play a part, but someone else can talk about that.
posted by biffa at 9:09 AM on October 24, 2003


Anyone willing to sink major $ in country #6- Hungary?

Paprika futures were up today in heavy trading...
posted by ZenMasterThis at 12:24 PM on October 24, 2003


How they classified Hong Kong as an emerging economy is beyond me. It has one of the most mature economies in Asia. And any "infrastructure" that is needed is already there, and in most part as developed and maintained, if not more developed and more well maintained, than the G7 countries (just compare the HK MTR to New York City's ugly subway system).

It has already experienced its rapid growth spurt in the previous decades, and it is suffering the same problems that are plaguing other mature economies, such as the loss of manufacturing jobs to developing countries. So how is this "country" (a lot of the same can be said about Singapore) even in the same league as all the other ones on the list?
posted by VeGiTo at 1:11 PM on October 24, 2003


To answer VeGiTo's question, from the website:

"The focus of this study is ranking the market potential of 24 countries identified as "Emerging Markets" by The Economist."

So, they haven't classified it as an Emerging Market, the Economist has. They've simply analyzed the countries the Economist is covering as Emerging Markets.
posted by tuxster at 2:30 PM on October 24, 2003


tuxster, I was aware of that. My question is actually directed at the Economist.
posted by VeGiTo at 3:00 PM on October 24, 2003


Israel is an emerging market?!

News to me, but if Hong Kong is, then surely Israel is as well. Israel's standard of living is equal or just better than the UK (I assume that this is the UK as a whole and not just England).
posted by zpousman at 4:37 PM on October 24, 2003


If you have money to put into real estate investments, spend it in Hungary, Romania, Bulgaria, or any of the former Soviet Bloc countries that are up for entry into the EU within the next ten years.

I know a guy who is buying property left, right, and center in Romania for peanuts (like $10-20k for a house), renting it out at bargain prices (to cover the mortgages), and when Romania enters the EU in 2007, he thinks the prices will be triple-quadruple what they are now.

Croatia is proving to be an early example of this, where prices are shooting up already as Western Europeans buy their way in. And Croatia has become this year's 'fashionable' place to go on vacation, so hey. I think the Eastern Bloc is going to be the next gold mine.
posted by wackybrit at 4:59 PM on October 24, 2003


To give credit to the Economist, I don't really see that big of a deal with the choice of countries. Sure if you choose a single specific criteria you can always claim that Hong Kong or Israel is better than this or that country. But overall, if you look at the countries and analyze the "maturity" of their economies: in terms of whether all the institutions are in place, whether a certain income level has been achieved, whether the growth rates have somewhat slowed down, whether economic swings are somewhat under control, etc., it is not that difficult to see the difference between developed or industrialized countries and emerging markets.

Oh, BTW, the analysis is not in terms of "stock market" or "real estate" investments, it's in terms of what markets companies (in general) should operate in...

Clearly the index is not industry specific. That's probably it's biggest weakness. The attractiveness of a market will certainly change from industry to industry as the importance of various criteria (e.g. government regulations) will change based on the industry. Yet, as a general index, I think it serves the purpose.
posted by tuxster at 6:13 PM on October 24, 2003


I'm not just saying Hong Kong is better than this or that country in Asia. I'm saying that Hong Kong ranks right up there and surpasses a lot of the "mature" economies.

GDP per capita ranking:

...
20: Hong Kong
21: France
22: Sweden
23: United Kingdom
...

Surely you wouldn't count France and UK (both part of the G7) as "emerging markets" would you? If GDP per capita is not good enough, which economic characteristics of Hong Kong can you think of that rank consistently lower than your "developed" or "industrialized" countries?
posted by VeGiTo at 6:39 PM on October 24, 2003


Emerging markets isn't about whether or not they have subways. It's about risk.
posted by dhartung at 10:45 PM on October 24, 2003


The World Bank and International Finance Corporation use different definitions, and the Economist probably uses a third. This is probably the best explanation of what constitutes an "emerging market". In most academic finance work, the World Bank definition is used, though I've seen the universe of EM economies broaden substantially over the past five years. Also see this.
posted by trharlan at 9:14 AM on October 25, 2003


dhartung's link first listed a whole bunch of characteristics of emerging markets, and then goes on to say that

"... there are countries such as Singapore and Hong Kong which do well on all these criteria but are still classified as emerging markets. To address this anomaly..." they basically have to force fit the definition to include these countries, so they tag a new criteria at the end, "we need to consider the fact that many emerging markets lack stability, either economically or politically or face considerable uncertainty".

But pardon me? If Singapore faces political uncertainty, the the United States should certainly be classify as an emerging market as well.

It seems like the self-righteous economists of the western world likes to call everything outside their handful of countries as "developing" or "emerging", and they would do everything they can to word the criteria to fit these country ex-ante. I bet you if China becomes a democratic nation with GDP surpassing the US in 10 to 20 years, it'll still be called "developing".
posted by VeGiTo at 1:26 PM on October 25, 2003


I guess I would like to add that while the Singapore and HK economies face some instability and uncertainty, they are not notably less stable or more uncertain than, say, the United States economy.
posted by VeGiTo at 1:39 PM on October 25, 2003


Jim: Well anyway, why are we having an official visit from this tin pot little African country?
Sir Humphrey: Minister, I beg of you not to refer to it as a tin pot little African country. It's an LDC.
Jim: A what?
Sir Humphrey: Buranda is what was used to be called an under-developed country, however this term was largely regarded as offensive, so they became known as developing countries and then as less developed countries or LDC's. We are now ready to replace the term LDC with HRRC.
Jim: What's that?
Sir Humphrey: Human resource rich countries.
Jim: Which means?
Sir Humphrey: That they're grossly over-populated and begging for money.

posted by dhartung at 7:35 PM on October 25, 2003


I guess I would like to add that while the Singapore and HK economies face some instability and uncertainty, they are not notably less stable or more uncertain than, say, the United States economy.

Got anything to back this up? Do you have the standard deviations of their GDP growth, stock markets, interest rates, or currency exchange rates, compared to the US? Or are you just speculating?
posted by trharlan at 11:39 PM on October 25, 2003


trharlan, HKD pegged to the USD, so the standard deviation of their currencies are exactly equal. Since HK doesn't have a flexible currency, the interest rates are not comparable to the US (because US doesn't really have a flexible interest rate: it is pretty much determined by the Fed's Open Market Operations). (Likewise HK pegs its currency to US using their own open market operations).

Stock market, it depends which indices you're comparing. The HK Hang Seng index has more s.d. than the S&P500, but less s.d. than the Nasdaq. HK does have a more varying GDP growth, but one data point does not an emerging market make.

The point is, though, that they forced fit the definition to include HK ex ante. And depite the sparse data, I've already done more leg work to justify that HK should not be categorized as an emerging market than any of your article has done to justify that it should be.
posted by VeGiTo at 2:30 PM on October 26, 2003


I'm not sure you have, VeGiTo...

The measures of risk you're giving, "stock market" and "exchange rate" are only measures of financial markets risk. This says nothing about political, economic, or financial risk in general. Additional risk criteria would include factors such as government stability, corruption, social tensions, bureaucracy, risk of profit repatriation, liquidity, currency reserves, and many more criteria. Just looking at the "financial markets" is a myopic view of risk at best...

Even with those measures, your analysis has problems. Since the HKD is pegged to the USD, analyzing their standard deviation serves no purpose. What you should look at is whether the currency is being considered overvalued by international investment community.

GDP per capita rankings are also misleading if you're using that as a measure of "Being developed". Look at the top 5: luxembourg, US, bermuda, cayman islands, and san marino...

Would you say that those are the 5 most developed countries in the world? It's clear that GDP per capita measures tend to favor small island or city countries...

Finally, I do agree that those two are probably the most questionable countries on the list.. But perhaps that's why they're ranked at the top as well...
posted by tuxster at 4:37 PM on October 26, 2003


Oh, by the way, Singapore ranks a mere #13 amongst the emerging markets in "Country Risk" according to the study that started this thread... So, your assumptions can't possibly be correct. (To your credit, Hong Kong is #2, after South Korea)
posted by tuxster at 4:41 PM on October 26, 2003


tuxter, i was only justifying s.d. for currency exchange etc... only because trharlan ask for it. And the people on the top 5 of GDP per capita are definitely very well off and none of those countries are considered "less developed".

Everybody keeps saying that it's about risk. The only thing I ask for is for you to list some characteristics of risk that would unequivocally puts Hong Kong on that list.

C'mon tuxter. Can you give me a few points exactly on why HK should be categorized as an emerging market?
posted by VeGiTo at 4:48 PM on October 26, 2003


What I'm really most concerned about is that categorizing the countries this way devalues the "emerging market" lists. It mislead investors into thinking that all the market on this list fit into the "high risk, high return" type of investing. These investors will then be disappointed to discover that investing in HK is more of a "relatively low risk, relatively low return" kind of deal.

I object to putting HK on this list because you can no longer expect the kind of insane return that is possible in true emerging markets.

(Unless you're deliberately picking the "red chip" chinese stocks that are listed on the HK stock exchange... But then investing in those companies is no different from investing in China, #5 on that list.)
posted by VeGiTo at 5:35 PM on October 26, 2003


VeGiTo, can you name a "developed" market economy that pegs its currency to the USD? Currency pegs are the tools of younger economies, in general. You may be able to find an exception, but I can't think of one.

The Hang Seng is a blue chip index with 34 components, so the Dow would probably be the best comp. If you're going to use the NASDAQ, you might as well use the PHLX semiconductor index-- it's just as appropriate for this comparison. And how do you know the SD comparisons? Can you source those claims or are they conjecture?

Earlier you were citing HK and Singapore, but you tried to refute my assertions using only HK. Do you think the Singapore case isn't as strong?

The point is, though, that they forced fit the definition to include HK ex ante. And depite the sparse data, I've already done more leg work to justify that HK should not be categorized as an emerging market than any of your article has done to justify that it should be.

Do you allege some sort of racism or conspiracy? Because I don't see it. According to Barry, Peavy, and Rodriguez, who've written the most popular text on the subject, factors that set emerging markets apart are: Fast GDP growth relative to developed nations, economic, financial, and political change, investability, and liquidity. HK meets all of those criteria. Until very recently, Singapore did as well.

Perhaps the very best way to solve this argument would be to look at the R-squareds of each of these markets versus the Wilshire 5000, and determine whether they are in the France/Germany range of .7 or the Argentina/Malaysia/S. Korea range of .3.

I don't have the data or the time to plug it all into S-plus, and I doubt that you do, but I humbly believe that you have an axe to grind, and I have absolutely no idea why.
posted by trharlan at 8:56 PM on October 26, 2003


trharlan, it's not about racism nor conspiracy, it's about the value of the "emerging market" list. It misldeads investors into thinking that HK has a "high risk/high return" characteristics similar to the other countries on the list. See my previous post.

And I focus on HK instead of Singapore because I'm more familiar with it, that's all.
posted by VeGiTo at 1:46 PM on October 27, 2003


That's tuxster, VeGiTo...

I think part of the problem lies with your definition of an emerging market. In your posts, you persistently refer to the stock market and its investors with sentences such as "The emerging market label misleads investors into thinking that all the market on this list fit into the "high risk, high return" type of investing. "

The general definition of an emerging market goes above and beyond the sole consideration of the stock market. You need to look at all types of business activities where firms invest through FDI, opening up factories and retail stores, finding suppliers, and forming alliances. Therefore an evaluation of the "overall business environment" goes into the definition of an emerging market.

From that perspective, I'm not at all concerned about "investors being misled into thinking Hong Kong is a high return market." If investors are stupid enough to buy into that argument without doing proper research, and simply because of a simple label, they deserve to lose money.

Also, please note that there is a difference between "less developed countries" and "emerging markets". Nobody is putting Hong Kong in the same basket as Chad or Kyrgyz Republic.

Having said that perhaps the following could be some of the reasons why both Hong Kong and Singapore are typically not accepted as "Developed markets":
- Neither are OECD members
- Over reliance on exports for its overall economic well-being
- The fact that they got hit hard during the Asian financial crisis (sign of dependence on external business cycles)
- China's political influence over Hong Kong
- Government's intervention in the economy

Note that I said could be since I have not sat down to examine each and every developed country and emerging market to perform a comparison on all these criteria. Those are things that I noticed that were common to the two countries and seemed to be different, in general, in Western developed countries.
posted by tuxster at 3:26 PM on October 27, 2003


oh tuxster... You'll be surprised how much the stock market is intrinsically linked to normal business operations of "opening up factories and retail stores, finding suppliers, and forming alliances". When the stock market works like it's supposed to, it is a good proxy of the general business conditions of the economy. And when I say "invest", what made you think that I only meant investing in the stock market, but not investing in private companies or investing your own money to open up a shop in HK? The "low risk, low return" comment applies to all these cases.

Of course I don't mean that investors should just blindly invest in the countries on that list. But the list should at least provide some guidance, or at least filter out the items that don't belong there. If the list can't even do that, it pretty much loses its value isn't? Taken to the logical extreme - a list constructed from choosing a bunch of country randomly would have very little value, regardless of what you call that list. This list of "emerging markets" is not random, but by forcefully include Hong Kong, it is less non-random than ideal.

And for your "reasons", they're completely inappropriate:

- Neither are OECD members

Since when does the membership in ONE organization makes or breaks the level of development of a market? Also, don't forget that HK cannot actually join many organizations because it is not officially a country.

- Over reliance on exports for its overall economic well-being

Uhh, so is Canada an emerging markets too? US has an over reliance on imports for its economic well-being, but it doesn't mean that a country has to not rely on export to be called a developed country. Both Canada and Japan are extremely dependent on exports.

- The fact that they got hit hard during the Asian financial crisis (sign of dependence on external business cycles)

Oh, so getting hit by an Asian crisis puts HK on that list, but Canada's getting hit by the US's burst of tech bubble doesn't put Canada on that list because it's not Asian? What about the current crisis of the EU economy... Where does that put France? How come Japan, who was already hurt before the Asian bubble, but was hurt even more afterwards, not on that list?

- China's political influence over Hong Kong

Well, technically HK is under China's rule, but for all practical matters HK has been operating pretty much the same as when it was under British rule. There's no reason to believe that the situation will change any time soon (except for the better).

- Government's intervention in the economy

You're not serious, right? I can't think of a single G7 country whose government intervenes in their own economy less than Hong Kong. For now I'll assume you're either not serious this is a careless oversight. I'll back it up if you want me to.

Those are things that I noticed that were common to the two countries and seemed to be different, in general, in Western developed countries

You are basically doing what the economists I'm complaining about doing: first decide on a handful of countries which you would call the developed countries. And then try to find some way to justify all the other ones being in the same group.

posted by VeGiTo at 7:51 PM on October 27, 2003


VeGiTo, that was the reason why I said "these could be the reasons" since I'm trying to second guess why the Economist identifies Singapore and Hong Kong as emerging markets. So your accusation in the last paragraph is undeserved in my opinion.

Your pattern of argument is not helping us develop this discussion since you keep on getting stuck on individual measurements and trying to find "anecdotal evidence" on how Hong Kong is better than this one developed country on that specific dimension.

A classification is made up of a combination of factors. I'm sure noone would ever argue that Hong Kong or Singapore ranks worse than all developed countries in all of those dimensions. Surely for each category, there is going to be one or more countries that may fare worse than Hong Kong. So, responding with "oh yeah, so what about Canada for this criteria and what about Japan for that criteria" accomplishes little. The combination of several factors leads to why economists see Hong Kong as an emerging market. I was merely suggesting what some of those factors could be.

In addition, you make a lot of sweeping arguments that simply seem misguided. I'll give a few below:

1) You belittled my comment about "government intervention". Well, according to the WSJ/Heritage Foundation Economic Freedom Index, here are the government intervention scores for the G7 and the two countries we're talking about (higher score means more intervention):

U.S.        2.0
U.K.        2.0
Germany    2.0
Italy       2.0
Canada    2.5
Japan       3.0
France     3.0
Hong Kong 3.0
Singapore  3.0

So your suggestion of "I can't think of a single G7 country whose government intervenes in their own economy less than Hong Kong" is clearly misguided since HK and Singapore rank worse than 5 out of 7 of the G7 countries, and are merely tied with the other two. (Oh BTW, I know that HK ranks first in terms of overall economic freedom, so no need to point that out. )

2) If you read the write up for HK from the same source and you can see that the majority of the write-up there focuses on China's influence on the political processes and various policies of HK. My discussions with various business leaders also convince me that this is a very real worry.

3) Role of exports in economy -- HK's exports/GDP ratio is 140% while Canada's is only 40% and Japan's is about 10% (Source: WorldBank Country At A Glance tables). Are you sure you want to put those countries in the same basket?

I think you can see the pattern here...

Finally, I'll repeat it: what is important is not this criteria or that criteria, but rather a combination of several factors.

Also, I'm not trying to defend their positions, but rather just being inquisitive and trying to figure out reasons why HK and Singapore are on that list. I thought I had already made that clear in a previous post:

Finally, I do agree that those two are probably the most questionable countries on the list.. But perhaps that's why they're ranked at the top as well...
posted by tuxster at 8:11 AM on October 28, 2003


I am not forcusing on this or that criteria. I am saying that the combination of all the factors make HK's economy more similar to the developed economies than the emerging economies, and potential investors are better serverd if HK is removed from that list (rather than being ranked #1 on a list it doesn't belong)

If you've ever lived in HK and then lived in Canada (like I did), you'd know intuitively that HK's economy is as mature as the western economies. As far as opportunities go, you can't say that investing in HK can expect to yield as much return as investing in the real emerging markets, such as China. Of course, HK is less risky, which is why its economic profile is more similar to those of the developed countries than the emerging countries.

Also, You failed to mention that HK's import/GDP ratio is around 140% as well. HK's economy depends very much on trade (not just export), which is a condition caused by HK's small population base, not by its level of development. In fact, I'll even go as far as saying, all else being equal, an economy that is more involved in trade with the rest of the world is more mature than one that is rather isolated from the rest of the world. If independence from trade is a criteria, then small countries will never be categorized as developed.
posted by VeGiTo at 8:58 AM on October 28, 2003


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