17/04/2009 15:45

UK companies should continue to keep an eye on the attractiveness of emerging markets and do their homework now so they are ready to make investments in those countries once the global economic situation improves, according to PricewaterhouseCoopers emerging markets group.

Although many emerging market countries are experiencing sharp slowdowns in economic activity due to the global financial crisis, not all of them have been equally affected by the negative outlook, prompting a need for a reappraisal of the relative risks of investing in those markets, the group’s latest investment index shows.

The annual PwC EM 20 Index ranks the top 20 emerging market countries by investment attractiveness in both manufacturing and services industries. It has been updated by PwC to analyse what impact the recent unprecedented turmoil in the world economy has had on long term investment prospects.

The latest rankings show Chile, Bulgaria, Malaysia, China and Poland as the top five countries in the manufacturing index, while Slovakia, Chile, Poland, Bulgaria and Malaysia head the services index.

Countries ranked higher in the Index tend to be those whose risk premia remain relatively low in an environment of significant upward revisions of risk. This time round the risk/reward economic model used to calculate the Index has been revised to take into account other elements of risk beyond the sovereign debt data primarily used in the past. The Index now places greater weight on the fundamentals behind country risk such as political stability, regulatory effectiveness and the rule of law.

Alec Jones, head of emerging markets, PricewaterhouseCoopers LLP, said:

“The rankings indicate that many tried and tested destinations still represent potentially attractive long term investment opportunities for British business. The less well placed countries in the rankings tend to be those without significant domestic markets or those not anchored within large trade or currency blocks.

"So even during these times of global financial crisis, there are still emerging markets that will appeal to UK companies for long term foreign investment. The selection process needs to be robust and reflect new realities but those companies that lay the groundwork now, will be best placed to act once the economic climate improves.”

Key findings from the EM 20 Index include:

• Chile, Malaysia and Poland have made the most significant advances in the manufacturing index
• The rise of Chile and Poland is largely a reflection of the fact that they have comparatively high GDP per capita levels and relatively attractive risk profiles that outweigh the tendency towards higher labour costs that can lead to falling manufacturing competitiveness
• China was the only BRIC (Brazil, Russia, India and China) country to improve its ranking in the manufacturing index, moving up to 4th from 14th; as was the case for Chile, Malaysia and Poland, this improvement was mainly driven by the fact that its country risk premium has risen by less than that of most other emerging markets.
• Slovakia, China and India are the biggest movers in the services index
• Slovakia’s rise to top the rankings is largely due to its relative political stability and its projected GDP per capital growth. The latter is an important determinant of attractiveness for businesses operating in the domestically-oriented services sector which is the focus of the services index.

ENDS

About the methodology

The PricewaterhouseCoopers EM20 Index provides a risk-adjusted measure of the relative value created per dollar invested in businesses in 20 key emerging markets. It considers ‘greenfield’ investments in both a stylised manufacturing company that is 50% export orientated, and a stylised services business that provides 90% of its services to the domestic market where it is located.

The two key factors differentiating the index from other similar country ranking exercises are:

• the index and rankings incorporate both the risk and the return associated with an investment in a particular country; and,

• the results are based on discounted cash flow analysis as used in actual business investment appraisals to combine the influence of different factors such as initial income levels, economic growth, tax, transport costs, tariffs and country risk premia, rather than the more judgmental weighting and scoring system used in most other such country rankings to capture the relative influence of such factors.

The index not only considers initial cost of each investment, but also analyses the stream of profits it is expected to generate and the relative risk associated with the investment As a result, it represents the relative attractiveness of business investment opportunities in each country, as measured by the present value of the cash flows generated by each US dollar of investment. These present values are then translated on to a 0-100 scale to derive the index values.

It should be stressed that the results are based on highly stylised businesses and necessarily make a range of simplifying assumptions. The rankings are not intended as a substitute for much more detailed case-by-case analysis of real business opportunities. The rankings also apply only to direct investment, and not to investment in equity markets or other financial assets.

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