Английский язык. Практический курс для решения бизнес-задач Пусенкова Нина

Extinction of the Predator

How Merger Mania Has Been a Disaster for the World’s Great Car Manufacturers

The star of the huge Frankfurt Motor show in 2005 may well be the luxury Mercedes-Benz s-class, the model on which the German company is relying to repair its faded reputation for superior quality. But the more significant event will be the presence for the first time of three different vehicles made in China and destined for export.

Today’s controversies over high petrol prices and fuel consuming cars in the huge US market offer only a partial picture of the future facing the auto industry. It may well be fully mature in North America, Europe and Japan, where over-capacity continues to undermine profitability. But globally the industry is set for huge expansion with the motorization of China and India. Within a few years China will replace Japan as the second-largest national market after America. Some experts predict that over the next 20 years more cars will be made than in the entire 110-year history of the industry.

Garel Rhys from Cardiff University says this growth will create the need for 180 new factories, each producing 300,000 cars a year – almost doubling the production capacity of the global industry to over 110 million units annually. Today’s car plants, he says, will need to be «renewed, retooled, refurbished and replaced to remain competitive. There is nowhere for the inefficient to hide.»

That is a bleak message for today’s established producers, many of which have merged their way to giant status, but suffer from legacy costs and operating problems and could now be beaten by new entrants and competitors that did not play the merger game. The question is: which of today’s big carmakers will be hurt the most? The question could be an even tougher one: which will survive?

Other industries subjected to similar waves of new competition have seen dramatic shake-ups and the disappearance of famous names – personal computers offer a good example. Some observers predict just that: famous carmakers will own the technology and brands, while manufacture and distribution will be contracted out. (This already happens with a few low-volume cars, such as the Porsche Boxster).

Consolidation in the car industry has been going on since its earliest days when 200 garage-sized firms were bundled into GM. By the middle of the 20th century famous names such as Studebaker and American Motors were closing down or being acquired by stronger companies, leaving the industry in the hands of GM, Ford and Chrysler.

Consolidation in cars is not as starkly obvious to the consumer as it has been in, say, PCs. Many brands still remain, as mergers and alliances between firms have simply bundled, rather than destroyed, them. No fewer than 58 brands survive among the ten largest manufacturers. In fact, if their affiliates as well as their wholly-owned subsidiaries are counted, the top five company alliances account for 75% of the global market, while adding the next five takes this to 90%, with producers in China, India and Malaysia making up the rest.

The strategy of consolidating behind the brands has not been entirely successful: there is an inverse correlation between the number of brands a firm possesses and profitability. GM is still the big beast of the industry, but it is no longer in any shape to acquire others. It has twice the number of brands of its closest competitor, Ford, but it is second to last in the profitability league. Toyota, the industry’s profitability champion, has only four brands and a handful of models, but a huge range of variants on them.

The industry has experienced a 20-year splurge that has seen GM swallow Saab and Daewoo, while signing up Isuzu, Subaru and Suzuki in Japan. Since 1989, Ford, the next biggest brand-acquirer, has taken over Jaguar, Aston Martin, Land Rover and Volvo. But it, like GM, has done more spending than getting. Jaguar still bleeds cash after an investment topping $5 billion and Volvo until recently has been in the red. None of this has done anything for the company’s profitability, leaving it just above GM and weak Fiat.

Seduced by Scale

The two biggest consolidation deals in the industry are also the most recent: the takeover of Chrysler by Daimler-Benz in 1998, and the alliance of Renault and Nissan the following year. DaimlerChrysler has been a flop so far. It has taken years to revamp Chrysler, slashing its surplus capacity and reviving the brand with new products good enough to drag it back into the black this year. Meanwhile, top management attention was diverted from growing problems at home as quality slid at Mercedes, which lost its dominance of the lucrative German market to its archrival BMW.

The best justification for the DaimlerChrysler deal was the growing cost of electronics systems in luxury cars. Mercedes was the world leader in such sophisticated electronics, but it was not a volume car producer, which meant it labored with a higher cost base. Daimler’s hope was that, by buying Chrysler, it could enter the volume end of the car market. German discipline was to produce rewards in the world’s biggest and (for good manufacturers such as Toyota, Nissan and Honda) most profitable market.

It did not work out that way. Daimler and Chrysler together are worth less in stock market terms than Daimler alone was before the merger. In 2005 the architect of the deal Jurgen Schrempp was nudged out of his CEO’s chair by leading shareholders.

The deal between Renault and Nissan was a bold move by the French company to gain global scale. Having put its house in order, the privatized French company saw its market capitalization rise as that of loss-making Nissan slipped. So Renault’s CEO Louis Schweitzer grabbed the opportunity to give Renault global reach. He made the Japanese a friendly offer. But he was cautious enough to take at first only a 37% stake.

The French later increased their holding to 44%, as Nissan’s industrial debt was cut by profits and by disposal of the firm’s outdated equity stakes in its suppliers. The deal has paid off. Indeed, Nissan’s earnings have been supporting Renault, as the latter has gone thorough a bad period due to the ageing model range and stagnant markets.

So there are several reasons for the end of takeover activity: the binges of the past have left the predators with, at best, no appetite for more or, at worst, with severe indigestion. Moreover, what is left amounts to slim pickings, as GM found when it decided to pay a $2 billion breakup fee merely to go back on a hastily made promise to buy troubled Fiat, after five years of collaboration had shown the Detroit firm how weak its Italian partner was. This surreal episode was a prophetic moment. Once the very fact that brands with the glamour of Ferrari, Alfa-Romeo and Maserati were available would have produced a scramble among potential buyers. Fiat’s financial difficulties would have been regarded as an opportunity, not a threat. Today no one wants to take them on.

The Brand News

The lesson of two decades of frantic M&As in the motor industry is that acquired brands, however strong and attractive they might appear, take years to restore. They first need refreshing, then bending to the shape and behavior of the new family. And they need to be refitted with the new products worthy of the badge on the front.

GM’s unhappy cohabitation with Fiat was concurrent with its ownership of Saab, which it bought as a consolation prize when it was beaten to Jaguar by Ford. 15 years later that, too, looks like a mistake. A frantic upgrade program is underway to reduce costs through platform and component savings with other members of the GM alliance group. But using the corporate parts bin is a quick way to cheapen a brand.

And then there is Volkswagen, pride of the European predators. It used acquisitions to expand geographically – first southwards to acquire SEAT in Spain, then eastwards to take over Skoda in the Czech Republic. In parallel with a masterful 20-year rehabilitation of Audi as a prestige brand, VW also snapped up Bentley and Lamborghini from their distressed owners.

Bentley has been a fabulous success with its Continental coupe. Lamborghini has a couple of new street racers that look good but have not yet turned a profit. Critics want to know how VW will cope with Volkswagen, SEAT and Skoda brands all fighting for the middle market and competing with each other, and what it can do to recover from the recent slide in the share of the American market, where only a few years ago it was zooming ahead. Expected job cuts in Germany, maybe up to 10,000 of them, will not begin to address that problem, but might provoke damaging strikes.

In-breeding as a Virtue

The most sensible of the carmakers has spurned the consolidation game. Toyota is still not the world’s largest by number of cars built, but given the speed at which it is growing (output has expanded by 1.5 million vehicles in the past five years, half the total growth in world production) and the speed at which GM is shrinking, the day when Toyota becomes the biggest is probably no more than five years away. Investors already recognize it as the leader. Its market capitalization, at $150 billion, is greater than that of GM, Ford and DaimlerChrysler combined ($90 billion).

This superiority was achieved by concentrating on organic growth. Apart from scooping up Daihatsu years ago, Toyota concentrated solely on renovating its own offering, with a relentless focus on efficiency, cost-cutting and new variations of successful models brought to market at an increasingly rapid rate.

Toyota’s luxury car business, Lexus, was created from scratch, rather than by the purchase of some other firm’s famous, but tired, brand. Lexus is now the best-selling prestige brand in America.

People laughed when Toyota announced its plans for creating its own luxury brand rather than paying for some other firm’s glorious history. But Lexus was spared all the tears and sweat associated with a takeover. And it succeeded by following a policy that many carmakers seem to find hard to copy: give people cars that don’t break and treat customers like royalty.

Buying brands and additional international reach have been the strategies behind many takeovers. But so was the aspiration of using volume to achieve economies of scale. Analysts are no longer sure, however, that there is any great merit in that. Keith Hayes of Goldman Sachs reckons that 500,000 copies off a single platform is about the point at which scale benefits start to drop away.

In the past, making large numbers of a few models was the way to thrive. Now it is all about making a few copies of a lot of derivatives. Look at the dozens of model categories in today’s Mercedes and BMW ranges – a few years ago they had just three each. Yet total sales of each brand are still only around 1 million. Creating niches from common platforms is the new way to compete. BMW now sees strong competitive advantage in maintaining differences between all the cars it sells. It is investing in infrastructure so that customers can change the specification of their car as late as 100 hours before it is built. That encourages customers to spend more on optional equipment. For the carmaker it also means that every assembly plant has to be surrounded by its own suppliers. An engine cannot be shipped across continents within 100 hours of a request. Separate factories allow for more variation, but at the price of fewer economies of scale. However, the greater the specification by consumers, the higher the premium price the carmaker can command.

The obvious conclusion might be that the 100-year-old car industry has done its rationalization and consolidation and that what remains must therefore be leaner and fitter. It should be, but it isn’t. John Murray from Trinity College, Dublin, points to a worrying loss of power by the carmakers, rather than the expected gain. The makers have pushed much of their intellectual property away to the first tier of component suppliers, which have taken physical assets along with the necessary skills. And the new multi-brand retailers and the Internet-savvy consumers are together gaining power and a bigger chunk of the value chain. The so-called car manufacturers are going to be left to take care of just design, marketing and brands – a long way from the traditional skill of managing big manufacturing business.

Of course, there is just a chance that GM will be renovated to become the next Nissan. Implausible recovery stories have happened every decade and have paid returns far greater than any takeover bid ever did. More likely is that GM will go on struggling with the consequences of the industry’s consolidation. In future, as the global industry expands, new names will join those of Toyota and a few others. Yesterday’s predators, obsessed by their takeovers and mergers, will give way to nimbler, smarter carmakers that will reshape the global industry.

Source: The Economist (on line), Sept. 8, 2005 (abridged)

Essential Vocabulary

1. controversy n – противоречие, спор, дискуссия

controversial a – противоречивый, спорный, дискуссионный

2. retool v – переоборудовать, оснащать новой техникой

3. refurbish v – переоборудовать, переоснастить

4.legacy n – наследство, наследие

5. wholly-owned subsidiary – дочернее предприятие, на 100% принадлежащее материнской компании

6. inverse correlation – обратная корреляция

7. in the red – с убытком

8.in the black – без убытков

9. cost base – база затрат

10. market capitalization (cap) – рыночная капитализация

11. loss-making – убыточный

12. reach n – зд. охват

13. holding n – капиталовложение, участие в капитале компании, владение, холдинг

holding a – холдинговый

14. outdated a – устаревший

15. payoff n – доходность, выплата, компенсация; развязка

pay off v – выплачивать, погашать долг, окупаться

16. predator n – хищник

predatory a – хищный, грабительский

17. breakup fee – неустойка, комиссия за прекращение контракта

18. collaboration n – сотрудничество, совместная работа

collaborate v – сотрудничать

collaborative a – на основе сотрудничества, совместный

19. strike n – забастовка; исполнение (опциона)

20. organic growth – органический рост

21. derivative n – созданный на базе чего-то, производный (в т. ч. финансовый инструмент)

derivative a – производный

22. optional a – не обязательный, по выбору

23. assembly plant – сборочный завод

24. premium price – цена с премией

Exercise 1. Answer the following questions.

1. What are the prospects and the estimated growth rates of the global car industry? 2. How was the process of consolidation in the car industry developing? 3. What is the relationship between the number of brands a carmaker possesses and its profitability? 4. What are the two biggest recent consolidation deals in the car industry and what were their respective outcomes? 5. Why has the takeover activity ended recently? 6. What are the problems that GM currently faces? 7. Has Volkswagen’s acquisition strategy paid off so far? 8. What is the secret of Toyota’s success? 9. What is the current winning strategy in the car business?

Exercise 2*. Find 15 verbs in the text that describe the process of improvement and modernization and make sentences of your own using them.

Exercise 3*. Match the definitions of takeover terms with the terms given below and tell a story of a real or invented takeover using as many of them as you can.

1. a takeover company’s best and most profitable division, which it may sell to discourage the raider

2. a provision in the employment contract of top-level managers that provides for severance pay or other compensation should the manager lose his or her job as the result of a takeover

3. a company «pays off» a potential acquirer to persuade him to leave the company alone. It pays him a premium to buy back the stock he purchased

4. firms or individuals that are employed by a target company to fend off a takeover bid; these include investment bankers, accountants, attorneys, tax specialists, etc. They aid by utilizing various anti-takeover strategies, thereby making the target company economically unattractive and acquisition more costly

5. anti-takeover strategy used by target firms whereby the target firm issues a charter that prevents individuals with more than 10% ownership of convertible securities from converting these securities into voting stock

6. the target company toward which a takeover attempt is directed

7. tactic in corporate finance used to counter a takeover or merger bidder who has made a formal bid to shareholders to buy their shares. When the board of directors of the target company meets to consider the bid, they «just say no».

8. a defense tactic used by the takeover target firm. The company goes after the raider firm and tries to take it over to prevent being taken over.

9. an illegal activity in which an investor or group of investors holds securities in its name until the raider needs them. The raider used this tactic secretly to gain a large enough stake in a firm. This allows him to «sneak up on» the takeover target; the target has little time to plan a defense.

10. a provision set up by the target company that forces the cost of a hostile acquisition to increase dramatically. The aim is to make it too expensive for the raider to acquire the firm.

11. the person or company attempting the takeover of another company

12. provision under which a target company will acquire a troublesome firm in order to raise the acquisition price and make acquisition by other parties economically unattractive

13. when a target firm implements this strategy, it will make an effort to make it unattractive to the hostile bidder. For example, a company may agree to liquidate or destroy all valuable assets, or schedule debt repayment to be due immediately following a hostile takeover

14. anti-takeover corporate charter amendments

15. a raider who sells off some of the assets of the target company once the target is acquired

16. any technique used by a target firm in which takeover protection could result in self-destruction

17. a company that is friendly to the takeover target. It intercedes to offer better terms or a better price

Takeover Terms:

Shark Repellents. Poison Pill. Stripper. White Knight. Crown Jewel. Suicide Pill. Lobster Trap. Golden Parachute. Scorched Earth Defense. Greenmail. Killer Bees. Maiden. Pac Man. Raider. Parking. Safe Harbor. Nancy Reagan Defense.

Exercise 4*. Fill in the blanks using terms given below.

Mergers and Acquisitions

The term M&A refers to the aspect of……. strategy and management dealing with the merging and acquiring of different companies. Usually mergers occur in a friendly setting where executives from the respective companies participate in a…… process to ensure a successful combination of all parts. Historically, though, mergers have often failed to add significantly to………

Financing M&A

Technically, what differentiates a merger from an acquisition is how it is financed:

Merger

A «merger» or «merger of equals» is often financed by an all stock deal (a stock…….). An all stock deal occurs when all of the owners of stocks of either company get the same amount of stock in the new combined……. The term…… is sometimes used to indicate the effective opposite of a merger, where one company splits into two.

Acquisition

An acquisition (of un-equals, one large buying one small) can involve a cash and…….. combination, or just cash, or a combination of cash and stock of the…… entity, or just stock. In addition, the acquisition can take the form of a purchase of the stock or other…….. of the target entity, or the acquisition of its assets.

High-yield

In some cases, a company may acquire another company by issuing…….. debt to raise funds (often referred to as a……). The reason the debt carries a high yield is the……. involved. The owner can not or does not want to risk his own money in the deal, but…….. are willing to finance the deal for a high……. The combined company will be the……..of the high-yield debt and it will be on its balance sheet. This may result in the combined company having a low……… to loan capital ratio.

Motives behind M&A

The following M&A motives are considered to add shareholder value:

………: This refers to the fact that the combined company can often reduce……… departments or operations, lowering the costs of the company relative to theoretically the same revenue stream, thus increasing profit.

Increased revenue/Increased market share: This motive assumes that the company will be absorbing a major competitor and increasing its power (by………. increased market share) to set prices.

……….: For example, a bank buying a stock broker could then sell its banking products to the stock broker’s customers, while the broker can sign up the bank’s customers for brokerage……… Or, a manufacturer can acquire and sell…….. products.

……….: Better use of complementary resources.

Taxes: A profitable company can buy a…….. to use the target’s tax……..

Geographical or other………: This is designed to smooth the earnings results of a company, which over the long term smoothes the stock price of a company, giving………. investors more confidence in investing in the company. However, this does not always……… to shareholders.

The following motives are considered to not add shareholder value:

Diversification: While this may hedge a company against a……… in an individual industry it fails to deliver value, since it is possible for individual shareholders to achieve the same hedge by diversifying their……… at a much lower cost than those associated with a merger.

Overextension: Tend to make the organization fuzzy and………..

Manager’s ambitions: Often the executives of a company will just buy others because doing so is newsworthy and increases the…….. of the company.

………: Managers have larger companies to manage and hence more power.

Manager’s сompensation: In the past, certain executive management teams had their……….based on the total amount of profit of the company, instead of the profit per share, which would give the team a perverse……… to buy companies to increase the total profit while decreasing the profit per share (which hurts the owners of the company, the shareholders).

Source: Wikepidia

Terms:

overlapping, risk, economies of scale, incentive, borrower, portfolios, profile, write-offs, high-yield, cross selling, corporate finance, due diligence, empire building, conservative, shareholder value, swap, entity, «demerger», debt, acquiring, equity interest, leveraged buyout, cost of capital, shareholder’s equity, capturing, accounts, complementary, synergy, loss maker, diversification, deliver value, downturn, unmanageable, remuneration, third parties

Exercise 5. Translate into English.

Абрамович свое получит

«Газпром» заплатит $13 млрд за 72,6% акций «Сибнефти».

Заключена крупнейшая в истории России сделка: «Газпром» покупает 72,6% акций «Сибнефти» за $13 млрд. Продавец, самый богатый россиянин Роман Абрамович, возможно, навсегда покончит с бизнесом внутри страны, оставив здесь лишь благотворительные проекты.

Сделка десятилетия

Весной 2004 г. «Газпром» впервые объявил, что хочет стать нефтяной компанией. Сначала он собирался поглотить «Роснефть» и «Юганскнефтегаз», который выставлялся на торги за долги «ЮКОСа». Но, когда «Юганск» достался «Роснефти», а та отбилась от слияния, «Газпром» начал договариваться о покупке «Сибнефти».

Вчера ударили по рукам: «Газпром» подписал соглашение с Millhouse Capital по покупке 72,6% «Сибнефти» за $13 млрд, сообщили компании в совместном заявлении. Еще 3% «Сибнефти» монополия выкупила у Газпромбанка, и в ее распоряжении будет более 75% нефтяной компании. Сделка заключена на рыночных условиях, цитирует «Газпром» председателя совета директоров, главу администрации президента Дмитрия Медведева. Вчерашняя цена одной бумаги в РТС – $3,65, днем ранее – $4, а по условиям сделки – $3,8. Капитализация «Сибнефти» в РТС – $17,3 млрд, а стоимость 72,6% – $12,57 млрд. «Всем очевидно, что условия рыночные, а цена справедлива для всех», – говорит Боб Форесман, глава Dresdner Kleinwort Wasserstein в России, которая консультировала «Газпром».

Подробнее ни «Газпром», ни «Сибнефть» не комментируют ситуацию. Два хорошо знакомых с условиями сделки бизнесмена обещают, что закроется она быстро: владельцы получат все деньги до конца октября. Это подтверждает и менеджер «Газпрома». В сделку войдут некоторые активы, не принадлежащие «Сибнефти» напрямую: 50% «Славнефти» и 38,5% в Московском НПЗ. Об этом сообщили два источника, близких к сделке. $13 млрд – это не все доходы продавцов компании. Незадолго до сделки акционеры «Сибнефти» утвердили дивиденды в $2,3 млрд.

Кредитовать «Газпром» на покупку будут банки ABN Amro и Dresdner Bank, Citigroup, Credit Suisse First Boston, Goldman Sachs, Morgan Stanley. Два банкира утверждают, что речь идет о займе до $13 млрд. Часть кредита «Газпром» впоследствии рефинансирует за счет средств, которые в конце года получит от «Роснефтегаза» (166,4 млрд руб.), а также за счет долгосрочных кредитов и еврооблигаций.

Формально «Газпром» не получил разрешения на покупку, а его совет директоров перенес вопрос на следующее заседание. Против сделки прямо высказывался министр экономического развития Герман Греф. Но это уже не имеет значения, уверен источник, близкий к Кремлю. В июле Владимир Путин признался, что знает о переговорах и акционеры «Сибнефти» «должны воспринимать это как рыночную сделку». Тогда его слова трактовали по-разному, говорит собеседник «Ведомостей», но теперь ясно, что это было одобрение.

Покупка «Газпрома» – крупнейшая за всю историю нашей страны. Максимум M&A в России зафиксировал Ernst & Young: в 2004 г. было заключено сделок на $30 млрд с учетом «Юганска». Заодно сделка с «Сибнефтью» попала на 3-е место в списке слияний в мировом энергосекторе, оплаченных деньгами. В 1999 г., по данным Thomson Financial, группа инвесторов купила итальянскую Ente Nazionale per l’Energia за $18,7 млрд, а испанская Repsol заплатила за аргентинскую YPF $17,4 млрд.

Источник: Ведомости, 29.09.05 (отрывок)

Emerging Markets: Has Their Time Finally Come?

With the world poised at critical crossroads – between recession and growth, war and peace, optimism and pessimism – now seems to be a timely moment to reconsider the case for emerging markets. In 2003, emerging equity markets actually held their value more successfully than developed markets, with declines of considerably smaller magnitude than those seen in the U.S., Europe and developed Asia.

The term «emerging markets» was coined by the World Bank’s International Finance Corporation in the early 1980s. Typically, emerging markets are in countries that are in the process of industrialization, with lower gross national product (GNP) per capita than developed countries. Of the 130 countries that the international financial community considers to be emerging countries, approximately 40 currently have stock markets. Emerging markets became the new frontier of global investing in the late 1980s and saw spectacular returns in the early 1990s, only to be followed by an exceptionally long span of disappointing returns. These markets seemed to lurch from one period of intense crisis to another with only intermittent spells of relief. The most intense storms during the 1990s were the Mexican peso devaluation of 1994 and its subsequent «tequila effect» contagion, the Asian financial crisis of 1997—1998, and the Russian ruble devaluation and debt default of 1998, which spread systemic risk into developed markets. Recently, the Argentine financial crisis has been in the spotlight.

During the longest U.S. bull market in history, emerging markets might better have been termed «submerging markets», declining 43% from 1994 to 2001, during a period when the S&P 500 index gained 130%. The disconnect between the potential of emerging markets and the actual returns of recent years has been extremely trying for investors, and many have decreased or eliminated their allocation to this asset class.

Despite the current sentiment, there is a strong case to be made that now is an ideal time for emerging markets investment. Like value investing renaissance in 2000 following the burst of the Internet bubble, market turning points are often uncomfortable, and even painful in the short term. It is important to remember that when the economic outlook and investor sentiment are at their worst, even a small turn of events toward the positive can be enough to re-ignite markets. Some observations suggest that emerging markets offer a compelling investment opportunity at present.

1. Historically Low Valuations

Valuation levels are extremely strong for the emerging markets asset class and even more so for active, risk-controlled emerging markets portfolios, which have a single-digit price-to-earnings ratio, with attractive earnings growth forecasts. Overall, the emerging markets are the most attractively valued equities available to investors.

The emerging markets asset class is now selling at historically low valuation levels as compared to similar assets in developed markets. Based on P/E, valuations are currently half those of developed markets, compared to an average of 0.75 over the past 15 years. Such compellingly strong fundamental value cannot be ignored.

2. Economic Triggers – Near Term

Of course, valuations alone will not ensure strong equity market returns if there is no improvement in the underlying economic climate. However, markets are discounting mechanisms and tend to rise in advance of actual economic recovery. Emerging markets have been one of the more responsive asset classes in discounting economic change. We saw this in Mexico in the mid-1990s, when the stock market recovered well in advance of the actual turnaround in the economy and currency.

While the prospective economic recovery in the developed markets is likely to be more drawn-out and less active in the early stages than in past recoveries, the emerging markets are likely to gain significantly from a discounting of world economic recovery. This could start within the next 6 to 12 months, based on historical precedent.

In addition, areas within the emerging markets are actually among the few pockets of potential strength in global growth. Ironically, some of the currently stronger economic growth prospects would be the former command-and-control economies of China, Russia and central Europe. Most of the developed economies appear to have uncertain prospects for next year, especially the U.S. and Japan. The emerging markets, in contrast, appear better poised to recover, having experienced the downturn earlier and in many cases more severely than their developed counterparts.

3. Market Volatility Change as a Spur to Outperformance

In addition, emerging markets have historically shown good performance when global equity market volatility has reached a peak and then declined. Global market volatilities have continued at a high level after their September peaks, but a reduction of uncertainty regarding world political and economic issues could be expected to reduce volatility levels – which would be beneficial to emerging markets based on past patterns.

4. Economic Triggers – Long Term

Beyond the near-term triggers, there are some long-term economic and political developments that may be quietly laying the foundation for a sustained period of better performance from these countries. These would include the world’s increased recognition of the strategic importance of developing nations, new models for economic development that stress free markets and individual initiative, and evidence that nations that followed now-discredited approaches to development (such as the old Asian economic model) are already striking out on new paths.

In the aftermath of the September 11 terrorist attacks on the United States, there is a heightened awareness of the importance of key emerging markets in global security. Recently, the U.S. has stepped up economic assistance to supporters in the war against terrorism, including Pakistan, Egypt and Turkey. It seems likely that a greater degree of political partnership with these nations could well translate into greater investor attention, stronger capital flows and positive market performance.

It is also likely that there will be broader support for emerging markets globally, as their pivotal role in the new world order emerges. Potential political and economic instability in the emerging markets could create havoc for the world economy. The recognition that lack of economic opportunity provides a fertile breeding ground for terrorism are expected to solidify global support for measures aimed at reducing instability in the world’s developing regions. Greater stability would have a positive effect on emerging markets, reducing the risk premium and boosting equity values. Even a focus on just the largest markets would likely boost the overall asset class, as «big ten» alone accounts for over 60% of total emerging markets capitalization (based on the MSCI Emerging Markets Free index).

Another stimulus to the long-term economic performance of emerging markets is greater recognition of free, open, transparent markets in promoting economic growth. Despite the noisy protests of «anti-globalization» groups at recent multinational meetings, there is a growing consensus that economic development promotes personal freedom. Greater acceptance of the linkage between economic development, free markets and individual freedom is likely to increase over time, stimulating growth in emerging capital markets.

Leading economists with influence on emerging markets policymakers have been arguing that free markets solve problems most effectively. They show the importance of three key characteristics for growing economies – openness, macro stability and small government. Wider acceptance of these views can be expected to promote long-term, stable growth.

Evidence that this is already occurring can be seen in Asia. Asian companies and policymakers demonstrate a clear movement away from the old economic model that prevailed prior to the 1997-98 financial crisis towards a more open, market-driven system. The old model was one in which the consumer saved actively, banks lent carelessly, and borrowing corporations over-invested with poor returns. While creating the illusion of steady growth, this model was in fact unsustainable.

While the degree of progress towards a new Asian economic model varies from country to country, our observations confirm a general shift towards a framework where consumers spend more and borrow more. Lending institutions in turn have tighter lending standards, putting corporations into competition for capital and necessitating higher returns on investment. This new paradigm offers the prospect of more sustainable growth and higher valuations for investors.

5. Assessing the Long-Term Fundamental Case

The fundamental case for emerging markets investment remains sound. The two decades since these countries first made forays into the capital markets are only a short period in world economic development and a fleeting moment in history. Yet during this period emerging markets have come a long way in establishing sound fiscal and monetary policies, restructuring their economies, addressing corporate governance, and improving their economic fundamentals. Keeping this in mind, the potential for continued rapid, positive change in these economies and markets is still very strong.

Long-term fundamental positives for the emerging markets include:

– Large, rapidly industrializing populations

– Undervalued currencies

– Declining current account deficits

– Improving infrastructures

– Competitive wages

– Increased competition, reform and restructuring

– High savings rates

– Long-term propensity toward growth

Of course, emerging markets vary a great deal in their political realities, their cultural and national identities, and their legal and economic institutions. Many emerging market populations are still in poverty and lack the basic means for development. Great attention needs to be paid to understanding the multifaceted nature of these countries. In short, investment in these markets remains challenging. However, we believe that with use of a wide array of information and skilled application of disciplined analytical tools, it is possible to avoid troubled areas and selectively invest in high-return countries and companies.

6. Conclusion

We think investors should look past the current market anxiety and make a careful and objective appraisal of the present opportunities in the emerging markets. We believe this asset class will serve investors extremely well in the long term, and that the current valuations and outlook justify an increase now in emerging markets allocations for global fund sponsors. The current uncertainty, while uncomfortable in the near term, provides a classic long-term buying opportunity.

Source: Ronald Frashure, Charles Wang of Acadian Asset Management, 2003. www.oycf.org