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In its April, 2008 Global Financial Stability Report, the IMF worries that financial problems have spread beyond the U.S. subprime market to the prime residential and commercial real estate markets, consumer credit, and the low- to highgrade corporate credit markets, but remarks that emerging market countries have been broadly resilient, so far. However, says the IMF, some remain vulnerable to a credit pullback, especially in those cases where domestic credit growth has been fueled from external funding sources and large current account deficits need to be financed. Further shocks to investors’ risk appetite for emerging market assets cannot be ruled out if financial conditions worsen, says the IMF.

But the last few months have seen a continuing flow of evidence that emerging markets are weathering the storm better than the developed world.

According to a new report from PricewaterhouseCoopers, CEOs of companies in emerging markets around the world are confident they can maintain high rates of growth funded primarily from internal resources rather than relying on outside investment, .

The report from PwC, entitled "Convergence & Differentiation: What is success in a connected world?", was launched at the World Economic Forum’s meeting on Latin America in Cancun in April, and suggested that growth in emerging markets is outstripping that of developed nations, blurring traditional economic distinctions.

In addition to the well-established emergence of the BRIC economies (Brazil, Russia, India and China), intra-regional trade and investment is fuelling explosive growth in such countries as Indonesia, South Korea, the Philippines, Singapore and Thailand, the report stated.

"The economic strength and confidence of the emerging markets could at least partially offset the impact of economic slowdowns in the developed world. The flow of capital, goods and labour among emerging economies is now growing faster than trade between emerging nations and developed countries," observed Samuel A. DiPiazza Jr., Global CEO of PricewaterhouseCoopers.

He continued: "The expanding connections of the economies in the developing world could insulate them from the worst impact of a downturn in the US and Western Europe."

The report noted that since 2000, emerging markets have run a current account surplus and have exported capital to the rest of the world.

Emerging markets have also driven the number of initial public offerings (IPOs) to record levels worldwide, with 70% of all IPOs in 2007 coming from emerging economies.

Emerging economies now also account for 45% of world exports, and have amassed 75% of all foreign exchange reserves.

CEOs of companies in emerging economies identified a number of risks to continued growth. They noted that a slowdown in the developed world could slow commodity exports, while fallout from the credit squeeze in the United States could impact local financial markets.

Longer term, CEOs in emerging market countries were sensitive to the potential impact of global climate change. Emerging-market CEOs believe more strongly than their counterparts in developed economics that governments should take a leadership role in determining strategies to combat global warming.

They believe that the developed world should accept more responsibility for the costs to correct its impact, an opinion shared by CEOs in the developed economies.

Asked how they would fund growth, most CEOs from emerging-market economies said they would rely on internally generated cash flow.

The debt market ranked a distant second as a source of capital. The equity markets, divestiture of existing assets, and accessing private equity and venture capital ranked far behind.

Of the 14 CEOs interviewed in-depth for the report, none said that access to capital was a barrier to growth, citing their company's strong credit ratings and a continued influx of foreign capital.

The PwC report identified three sets of "strategic drivers" that contribute to the success of companies in emerging markets and enable them to differentiate themselves in an increasingly converging world.

These differentiators are asset-driven, including financial strength, brands and people; process-driven, including supply chain and innovation; and organisation-driven, including governance and structure.

Ironically, the report found that often the very factors that make companies in emerging markets unique and successful are viewed by some outsiders as limitations.

For example, because emerging markets once faced difficulties in attracting capital, companies became adept at building internal capital reserves and maintaining healthy credit ratings. They also developed disciplined financial structures that serve them well today as their home markets grow quickly and attract foreign investment.

The report also addressed cultural, structural and business networks components of organisations.

It found that in some cases, traditional "command-and control" structures associated with family enterprises gives them the agility necessary to succeed in the current business environment.

Also, according to the report, most emerging market CEOs perceive government as more of an obstacle than a pathway to private-sector development. Emerging-market CEOs more strongly factor in regulatory concerns when making business decisions than do their counterparts in developed economies.

Yet, 30% of emerging market CEOs believe that current governments are creating a business-friendly environment, slightly higher than the 24% of CEOs from developed economies who think likewise, the PwC report concluded.

More recently yet, Deutsche Bank noted the robust performance of emerging markets investments, announcing the results of its sixth annual Alternative Investment Survey, which was conducted during March 2008 by the Bank's Hedge Fund Capital Group.

Over 1,000 respondents from 500 institutions responded to this year's survey, including banks, corporations, insurance companies, consultants, family offices, high net worth individuals, wealth management companies, funds of funds, pensions, endowments and foundations.

"Hedge fund investors' prediction that the Middle East and North Africa will be the top performing region in 2008 indicates a clear redistribution of capital towards emerging markets," commented Sean Capstick, London-based Co-Head of the Hedge Fund Capital Group.

He continued: "The survey also shows that the number of early stage investors has fallen by 25 percent in the past year, making 2008 a more challenging environment for startup funds."

"Hedge fund investors are cautiously poised, as shown by their increased focus on risk management and plans to allocate to strategies which are not sensitive to equity market risk," noted Maarten Nederlof, New York-based Co-Head of the Hedge Fund Capital Group. "We also found that despite their overall bearish outlook on the economy, investors predicted more than USD200bn will flow into the industry."

The majority of investors surveyed plan to increase their allocations to emerging markets, with the Middle East as the predicted top performer amongst all regions.

Despite the bullish noises that continue to surround emerging market performance, look back a few years, however, and you'll come up against a scary series of defaults and emerging market crises such as the Russian debt default in 1998, which brought down one of the world's largest hedge funds in Long Term Capital Management and sparked fears within the US government of a meltdown in the banking system. Other examples are the Asian financial crisis of 1997/1998 and Argentina's debt default in 2001. Even the jailing of former Yukos CEO Mikhail Kordokovsky on fraud and tax evasion charges in October, 2003 caused the entire Russian stock market to fall 15% in one week.

Could it happen again? That's the question a long-term emerging markets investor has to ask, and that's the issue that underlies the persistent discount of emerging markets stocks to those in the developed world.

What exactly is an emerging market?

Many international agencies consider all non-high income countries to be "Emerging Markets", stressing the potential of all nations to develop. Others include only those countries that meet certain levels of economic development and in which local equity and debt markets are operating. In general, Emerging Markets countries are characterized by an underdeveloped or developing commercial and financial infrastructure, with significant potential for economic growth and eased capital market participation by foreign investors. Countries generally considered to be Emerging Markets possess some, but not necessarily all, of the following characteristics:

• Per capita GNP of less than US $9,656 (a World Bank definition of low- and middle-income economies);
• Recent or relatively recent economic liberalization (including, but not limited to, a reduction in the state's role in the economy, privatization of previously state-owned companies, and/or removal of foreign exchange controls and obstacles to foreign investment);
• Debt ratings below investment grade by major international ratings agencies and a recent history of defaulting on, or rescheduling of, sovereign debt;
• Recent liberalization of the political system and a move towards greater public participation in the political process; and
• Non-membership in the Organization of Economic Co-operation and Development (OECD).

Countries that are usually considered classic examples of Emerging Markets include Argentina, Brazil, India, Mexico, China, Central and Eastern European nations and Russia. Others that may be considered borderline cases, possessing fewer of the above characteristics, include Greece, Portugal, and Turkey.

Countries which meet many of the definitions above, but which have not yet been the focus of significant foreign investment, are often referred to as "pre-Emerging Markets" or "emerging Emerging Markets". These countries include most of Africa, some Central American nations, and a number of the former Soviet republics.

South-East Europe Is Flavour Of The Month

Countries in the southeast region of Europe featured strongly in this year’s PricewaterhouseCoopers EM20 Index, a ranking of attractive emerging markets based on the firm’s country risk and reward model.

The index, which was launched in 2007, shows once again that, while the BRIC countries (Brazil, Russia, India and China) continue to offer interesting opportunities, there are other locations - nearer to home - that offer attractive alternatives for UK companies looking to invest in emerging markets.

While Egypt tops the PricewaterhouseCoopers EM20 manufacturing Index this year, Bulgaria and Serbia are ranked second and third, with Romania in seventh place.

Those three countries make up a ‘golden triangle’, as they also feature in the top ten of the services Index which is headed by Poland.

The PricewaterhouseCoopers EM20 Index report noted that while there are still downsides to these markets in terms of infrastructure and governance issues, southeast Europe deserves to be given serious attention as a region with considerable potential.

For manufacturing companies seeking to invest in emerging markets, low production costs are a key requirement. Other factors then come into play, including the location’s country risk premium, its distance from key export markets and the local corporation tax rate.

For businesses in the services sector, relatively high GDP per capita levels are a significant factor.

Typical service businesses represented in the model would be banks, insurers, media, telecoms and IT-related operators.

Ian Coleman, UK head of emerging markets, PricewaterhouseCoopers LLP, commented that:

“This year we have run our model on historic data for all countries we have looked at to give a five year track record. This allows us to consider the direction – and speed - of movement of various countries within the PricewaterhouseCoopers EM20 Index over time and spot rising (or waning) stars."

"Political risk has emerged as a factor which has a major impact on countries ascending or descending both indices. This is illustrated particularly strongly by Serbia which has dramatically improved its performance in the manufacturing index, largely due to improving political stability since 2000. In 2008 Serbia is third in the index, compared to 25th in 2004."

Colman continued: “The impact of political risk is also evident across central and south east European member states of the European Union. Slovakia, which joined the EU in 2004, has enjoyed political and economic stability which has made it a rising star of the services index, sixth place in 2008 up from 16th in 2004. The trend is also reflected in the experience of Romania and Bulgaria, which joined the EU in 2007."

This year’s PricewaterhouseCoopers EM20 Index includes a number of refinements to the methodology used to rank the emerging markets.

In particular, the scope of the model has been expanded to include all countries considered as plausible candidates for foreign direct investment (FDI).

A number of extra filters have also been applied during the process of identifying emerging markets, according to PwC, so that the stylised investment model better reflects the real-world decisions which companies make when deciding where to invest.

This has resulted in some countries no longer meeting the criteria and falling out of the index, while others have entered it for the first time.

The sustained interest of hedge funds in emerging markets is echoed across the financial landscape, with many bank and other institutions behaving as if emerging markets will form a long-term part of their investment horizons. But nowhere is it more marked than in the GCC, and particularly in Dubai.

In April 2007 Deutsche Bank announced the expansion of its 'aXess' equity products to include markets of the Gulf Cooperation Council (GCC). The bank's aXess service is a suite of structured equity products that address the demand of international investors by providing full economic exposure to a wide range of markets across the globe.

In justification of the move, the bank said that not only are the GCC markets some of the fastest-growing in the world, they possess one of the fairest valuation levels and have low correlation with other markets, thus providing good opportunities for diversification. By deploying aXess into the GCC, Deutsche Bank said it is facilitating local investment by international investors.

Deutsche Bank aXess products allow investors to obtain immediate exposure to the performance of local shares via a Luxembourg listed instrument which is settled via Euroclear in US Dollars. Deutsche Bank acts as market maker and provides comprehensive price transparency. This aXess product suite expands on Deutsche's equity derivative and swap offering for the region. Deutsche Bank will initially provide access to Dubai, Abu Dhabi, Bahrain and Qatar.

Kerim Derhalli, Global Head of Emerging Markets Equities for Deutsche Bank commented: "Providing 'aXess' to the GCC builds on our extensive strategic commitment to the Middle East and North Africa. By furthering Deutsche Bank's innovative and market leading product offering we continue to strengthen our premium emerging markets position."

In March, 2007, Citigold Corporation Limited, the Australian gold mining company, became the first company from the East Asia/Pacific region to list on the Dubai International Financial Exchange (DIFX).

Commenting on the move, John Foley, Chairman of Citigold stated: "As the region's international exchange, the DIFX is the ideal gateway for Citigold to connect with regional investors. Our listing of ordinary shares on the DIFX makes Citigold a leader in the international capital markets, just as we are at the forefront of the Australian gold mining industry.”

Computershare, the world's largest share registry, has created an innovative link that allows brokers and investors around the world to easily trade Citigold’s shares on either the DIFX or the Australian Stock Exchange (ASX), where Citigold shares have been listed since 1993.

Per E. Larsson, Chief Executive of the DIFX, stated that: “We welcome Citigold as the first company from its region to list on the DIFX. The exchange now has eight equity listings and these come from companies around the world, from Bahrain to South Africa and from Switzerland to India. The connection with the ASX through Computershare is the DIFX's first such dual listing link with an exchange outside the Middle East."

Mark Lynch, Managing Director and CEO of Citigold, added: “With the gold market in Dubai becoming a highly sophisticated market and the DIFX emerging as a trusted international stock exchange, we are confident that the opportunity to invest in gold stocks on the DIFX will be well received.”

Paul Conn, President of Global Capital Markets at Computershare noted: "We are pleased to launch this cross border service for Citigold and the DIFX, and to extend it to other issuers that choose to dual list on the DIFX to gain access to investment and liquidity in the Middle East region. We also look forward to creating further links between DIFX and other markets around the world, as market demand warrants.”

Hamed Ali, Executive Officer of the DIFX, observed: “As well as looking forward to further listings from companies around the world, the DIFX is preparing for more listings from prominent firms in its own region. These will satisfy investor demand for a diversified product range and enable the issuers to reach a new investor base."

Citigold, which has its regional headquarters in Dubai, currently has nearly 50 UAE-based investors on its share register, who account for over 3% of Citigold stock. Citigold said it expects this figure to increase following the listing on the DIFX.

Emerging In The City

Of course it's not just in emerging market stock markets themselves that local companies choose to list. There have always been plenty of Global Depositary Receipts and American Depositary Receipts for companies with illiquid domestic markets, and large Russian, Chinese or Latin American companies frequently list directly on major stock exchanges, offering an alternative play for emerging markets investors.

Now, according to offshore law firm, Walkers, offshore listings on the London Stock Exchange's Alternative Investment Market (AIM), an international market for smaller growing companies, are on the rise.

Walkers reports that it is seeing more interest from companies in India, China, and other emerging markets who want to gain the benefits of offshore listings by accessing the exchange through Jersey and the British Virgin Islands.

“AIM offers a tremendous amount of liquidity to smaller companies, as well as access to institutional investors who often turn into mentors and partners,” observed Hiren Patel, a partner in Walkers’ Jersey office who did the first offshore AIM listing for a Chinese company in 2004.

“It’s a win-win situation since AIM has lower listing fees compared to other exchanges and investors often see significant return on their investments in emerging markets which AIM can access. There are clear tax advantages, on top of the benefits of AIM listing, if the listing is done through an offshore jurisdiction such as Jersey or the BVI," Patel added.

The firm's optimism seemed to have been borne out when the London Stock Exchange announced in June, 2008, that KSK Emerging India Energy Fund Limited had become the fourth Indian firm to float on AIM in the last four weeks. Between them the four new Indian firms have raised an estimated USD387mn.

KEF is a closed ended investment company established to make investments in companies engaged in the Indian power and energy sector.

On admission to AIM, KEF raised USD200mn, the largest AIM float to date in 2008. The other three Indian firms to have joined AIM over the past month are Indus Gas, OPG Power Ventures and Mortice Ltd.

Tracey Pierce, Head of Equity Primary Markets, London Stock Exchange Group, commented:

“With London now firmly established as the number one market for international companies it makes sound sense for Indian companies with global aspirations to look to join the London Stock Exchange."

"The four Indian firms that have chosen to go global through AIM over the last four weeks are now benefiting from access to the world’s deepest pool of international capital and a knowledgeable, outward looking, professional investor base, committed to serving emerging markets. The pipeline of growing, innovative Indian companies looking to admit to AIM remains strong.”

KEF’s arrival takes the total number of companies from India on the London Stock Exchange’s markets to 52, with a combined market cap of USD16.8bn. In total Indian firms have raised USD5.3bn through flotations on the London Stock Exchange. Trading in the secondary market also remains strong, with over USD5bn worth of trading in Indian securities on the International Order Book so far this year.

Stock Markets In Emerging Economies

There are more than 30 stockmarkets in countries which could broadly be considered as 'emerging', and it's not possible to cover them all here (but see the Lowtax Network Intelligence Report On Offshore Stock Exchanges on sale from www.lowtaxlibrary.com).

Dubai is prominent among emerging financial hubs. The first Middle East International Banking, Financial Technology and Services Exhibition and Conference (MEFX) took place in June. Presented by the Dubai International Financial Centre (DIFC) and organised by the Dubai World Trade Centre (DWTC), MEFX was held from 1st - 3rd June, 2008 at the Dubai International Convention and Exhibition Centre.

Over 70 participating companies from 20 countries showcased advancements in products, technologies and services in the financial industry.

The UAE banking sector is the largest in the GCC, and its annual growth rate of 35% exceeds the country's GDP growth rate.

Helal Saeed Al Marri, Director General of the DWTC, commented that:

"As the regional financial industry continues its unprecedented growth, we are delighted to create an annual fixture in the event calendar to facilitate the networking of the region's market leaders and emerging players with global suppliers in financial technologies and services."

"MEFX will evolve to be a most productive platform to accelerate the product and knowledge exchange within the regional financial community to ensure it keeps abreast of the dynamic momentum of development."

Abdulla Al Awar, Managing Director of DIFC Authority added that:

"The launch of MEFX comes at a time when the regional financial market is entering a new phase of development. Overall economic growth has enhanced the financial industry and markets within the region have become vital for global financial institutions seeking to grow."

"MEFX provides a great opportunity for industry professionals to share ideas and best practices that will foster further growth in the industry. DIFC is supporting MEFX as part of its objective of promoting financial business events that showcase new products, technologies and initiatives that can drive industry development."

Amongst the other issues addressed at the event, a specialised session focused on the Islamic Finance market, which is growing at a phenomenal rate of 20% annually.

The session will feature Naveed Ahmad, Head of Investments, Dubai Islamic Bank, who will discuss Wealth Management Solutions and Shari'ah compliant products for high-net-worth individuals.

Hot on the heels of Dubai as financing hubs for the Asia/Pacific region are are Qatar, Brunei and Labuan. Releasing its 2007 Annual Report in May, the Labuan Offshore Financial Services Authority (LOFSA) revealed that the Labuan IBFC continued to record double-digit growth in the number of new offshore companies, which totalled 6,297 in 2007.

The availability of expertise and quality service providers and the wide spectrum of products and services has made the Labuan IBFC an increasing attractive domicile for investors, LOFSA suggested.

The offshore banking industry reported an expansion in the loan assets, complemented by an improvement in the asset quality.

The total assets of offshore banks increased by 27.8% from USD21.1bn in 2006, to USD 27bn in 2007. The gross non- performing loans indicator also improved further, from 2.8% in 2006 to 2.0% in 2007.

The offshore leasing business continued as one of the main offshore financial activities, to become one of the highest growing financial industry in Labuan IBFC in 2007.

Total new lease financing increased by 18.7%, resulting in a cumulative financing of USD14.1bn. This has been boosted by strong activities in the oil and gas sectors, as well as increased shipping activities in the region.

The report went on to reveal that the offshore insurance industry continued to expand, particularly in the reinsurance business sector, which grew by 40.3% to USD919.2mn in 2007, of which 62.0% were non- Malaysian premiums, signalling its growing role as a reinsurance centre.

This is also reflected by the increasing amount of re-takaful contributions, amounting to USD108.4mn, an increase of 42.8% from 2006.

For the year 2007, Islamic-based assets in the Labuan IBFC continued to grow, to USD1.2bn, representing an increase of 36.9% as compared to 2006. There was strong interest from investors from the Middle-East seeking to invest in the Asian region.

The position of Malaysia as an International Islamic Financial Centre (MIFC) has further enhanced Labuan’s effort to promote Shariah compliant trusts and foundations, as these products complement the Islamic financial products and services that are already available onshore.

The Labuan International Financial Exchange (LFX) also recorded four new listings, bringing the total number to 31, with total market capitalisation of USD15.1bn.

One of the major listings was the Sukuk issuance of USD1bn by Saudi Arabia based Dar Al-Arkan International Sukuk Company.

Going forward, LOFSA has identified several key strategic programmes to advance Labuan as an International Business and Financial Centre.

One such initiatives is to elevate Labuan IBFC‘s status to being the “gold standard for holding company jurisdiction”.

Malaysia’s extensive tax treaty network with more than 60 countries and the introduction of a more flexible tax framework supports this initiative.