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Patterns of Growth in Guyana

Guyana’s economy is characterized by volatile production patterns in all of its key productive sectors. Notwithstanding, GDP growth, though declining, has been relatively healthy over the 10-year period, 2007-2016, averaging 4.2% annually (See Chart 1).

Although the Mining and Quarrying sector, fuelled primarily by increasing gold production, is the only sector to experience strong growth over the past three years, the Agriculture, Fishing and Forestry sector remains the overall largest contributor to GDP growth, averaging 18.3% over the 2006-2016 (See Chart 2). Comparatively, the Mining and Quarrying sector’s contribution averaged 10.2%.

However, the contribution of Agriculture, Fishing and Forestry has been declining steadily, falling from 21.5% in 2006 to 15.2% in 2016. Comparatively, Mining and Quarrying’s contribution has increased from 9.6% to 13.8% in the same period, indicating the growing contribution of gold. After falling by 19.5% in 2014, gold production picked up significantly in the following two years, growing by a record 58.1% in 2016. (See Chart 3).

Bauxite, the other main component of the Mining and Quarrying sector, on the other hand, has experienced dramatic swings in production. Though the sector experienced very strong growth in 2007 and 2011, growing by 51.7% and 68%, respectively, its average growth rate for the 2007-2016 period was only 4.2% (See Chart 4).

The rice sector experienced strong growth between 2008 and 2015, reaching record production levels in 2013. However, production slumped by 22.3% in 2016, lowering rice’s average 10-year growth rate to 6.5%.

Sugar and timber have been the two weakest sectors over the 10-year period, 2007-2016. They have experienced the highest degree of volatility and have both on experienced negative growth rates over the period. Sugar production fell by an average of 2.8%, while timber production fell by 2.7% (see Charts 6 and 7).

Evidently, volatile to declining production patterns have had a slowing effect on Guyana’s economy. A reversal of this trend is necessary if Guyana is to reduce its dependency on oil which is expected to come on stream in 2020.

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Emerging Markets Equity Investing: Never Waste a Crisis

Emerging-market equity investors are likely happy to bid goodbye to 2018—a year filled with challenges and uncertainties. Chetan Sehgal, Franklin Templeton Emerging Markets Equity’s director of portfolio management, examines some of these challenges and uncertainties, and makes the case that investors may have been overreacting. He says many emerging markets were unjustifiably priced for crisis-type situations.

In 2018 the world economy—and global relations—entered unfamiliar territory, with rising geopolitical and policy risks. We are witnessing the global supply chains and trading relationships that have been integral to growing global prosperity come under increasing pressure. Thus far, emerging markets (EMs) appear to have borne the brunt of the fallout: an asymmetric—and, in our view, excessive—market reaction that has contributed to valuations at near crisis levels by November 2018. However, these are valuations that to us represent increasingly attractive buying opportunities, given where fundamentals stand.

What Are Markets Anticipating?

There has been a substantial divergence in performance between EM and US equities during 2018, on a scale that we find challenging to justify. While the United States has benefited from the one-off, near-term impact of tax cuts and repatriation of overseas profits, this impact is expected to sharply fade in the coming two years, which is forecast to result in widening EM outperformance in terms of economic and earnings growth. The International Monetary Fund sees EM economic growth in 2019 holding steady at 4.7%, while it has forecasted growth in advanced economies to slow from 2.4% in 2018 to 2.1% in 2019. Additionally, estimated EM earnings growth of 10.5% in 2019, while below projections of 15.4% for 2018, would nonetheless compare favorably with estimated US earnings growth of 9.5% for 2019, down from 21.2% for 2018.1 On a forward-looking basis, we believe current fundamentals do not warrant the declines seen in EM assets over 2018. And while investor expectations may deteriorate, we think the gap between EM fundamentals and valuations is such as to provide a reasonably large margin for performance potential.

Trade tensions have been a primary contributor to weakness in EM equities, and while exports remain a key engine of growth for EMs, they are increasingly shipped to other emerging economies; the relative importance of developed markets has declined. Similarly, the roles of consumption and technology in generating economic growth have become more prominent; EMs have become more domestically orientated. While tariffs undoubtedly come at a challenging time for China as it seeks to deleverage its economy, the impact will also be felt globally—recent US corporate earnings announcements and concurrent equity market volatility are testaments to this. Politicians may yet conclude that trade wars are not easy to win.

Resilient to Contagion and Financial Shocks

EM equity sentiment and performance have also been impacted by the increased perception of crisis, driven by the much-publicized travails of smaller nations. We believe that weaknesses in markets such as Turkey and Argentina are unlikely to result in broader macroeconomic contagion, given the extent to which these countries have been outliers in terms of financing requirements and unorthodox policymaking, though the impact on sentiment has evidently resulted in a degree of equity market transmission. Moreover, these markets make up a small part of the EM and frontier market universe: within the MSCI Emerging Markets Index, there were about 20 companies as of October 2018 that had individual weightings larger than Turkey’s as a whole; Argentina is even less consequential from an index standpoint.

US-dollar (USD) strength has been a further factor behind EM weakness over 2018. The near-term boost to US gross domestic product growth from tax cuts has placed upward pressure on interest rates, while repatriation as a result of regulatory change has increased demand for USD assets. Accordingly, while EM earnings growth has been in double digits in local currency terms, it has been substantially weaker when USD-denominated.

Emerging markets are confronted with a number of near-term challenges, resulting in valuations that were approaching crisis levels by November 2018—but longer-term buying opportunities for us are developing given continued underlying fundamental strengths.”

Chetan Sehgal, Director of Portfolio Management, Franklin Templeton Emerging Markets Equity

While rising rates—by design—apply pressure to growth and inflation expectations, this is not solely restricted to EMs, and most debt ratios are considerably higher in the developed world. EMs in aggregate have shifted to current account surpluses, floating exchange rates and a reduced reliance on USD debt funding. However, those emerging economies (and companies) pursuing less prudent policies have been punished heavily by financial markets. Investors appear to be increasingly discerning between winners and losers, which presents opportunities for active management.

Technology and Rising Affluence

The near-term challenges and poor sentiment toward EM assets have, in our view, obscured the longer-term picture, which is one of transformation as economies increasingly evolve away from dependence on exports, commodities and state-owned enterprises and toward more resilient sources of growth. Technology has become a primary driver of returns in emerging markets, whether manifested through world-leading semiconductor manufacturing, online gaming or internet banking, while e-commerce platforms facilitate rising consumerism. We retain confidence in the sustainable earnings power of many technology-orientated EM companies despite some sharp share-price corrections over 2018.

Consumption in EMs is not only a story of superior demographics and increased product penetration. Growing middle-class populations and increasing affluence should continue to drive “premiumization,” spurring demand for high-end products in EMs. We believe companies with strong premium-brand positioning and superior products should see sustainable and higher-than-average industry growth levels in the years to come.

Never Waste a Crisis

EM valuations have been approaching crisis levels due to substantially weakened confidence (and performance), yet cash flows and earnings generally remain resilient. These conditions, when paired with improving corporate governance that includes dividend payouts and buybacks, present an increasingly attractive long-term buying opportunity for us. Many currencies have been cheap, and as value-oriented, long-term investors, we continue to invest in companies that demonstrate sustainable earnings power and trade at a discount relative to their intrinsic value and other investments available in the market.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What Are the Risks?

All investments involve risks, including possible loss of principal. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with developing markets are magnified in frontier markets.

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of the publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.


1. Sources: FactSet, MSCI and Standard & Poor’s. Data as of 10/31/18. Based on estimated earnings-per-share growth of the MSCI Emerging Markets Index and the S&P 500 Index. There is no assurance that any estimate or projection will be realized. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at

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Guyana, a frontier market in the making

Part 2 of 2

As a fledgling frontier market, Guyana is planning to take bold steps to improve its securities market infrastructure, revamp its regulatory regime, and digitize its operations.

Work has also commenced on the digitization of the country’s National Payments System (NPS), which in addition to making the transactional banking process more efficient, would also facilitate automated clearing and settlement of securities.

These developments, in combination with policy, regulatory and legal reforms could enhance the potential for Guyana to become an internationally recognized frontier market, putting it on par with Jamaica and Trinidad which are currently recognized as frontier markets by the globally recognized index provider, Morgan Stanley Capital International (MSCI).

Such recognition would put the Guyana Stock Exchange (GSE) on the radar screens of international investors, enhancing the potential inflow of foreign capital into the market to the benefit of listed companies. Investors in the market could also benefit from an increase in stock prices resulting from an infusion of liquidity and higher demand for local securities.

But the foregoing developments would be predicated upon the successful implementation of reforms proposed by the government.

Currently the Guyana Association of Securities Companies and Intermediaries Inc (GASCI) is responsible for organizing and supervising the GSE. GASCI, a self regulatory organization, is registered with the Guyana Securities Council (GSC).

GASCI is comprised of four member firms which provide broker services for customers who buy and sell shares) on the stock market. These firms include Trust Company (Guyana) Ltd., Guyana Americas Merchant Bank Inc., Beharry Stockbrokers Ltd., and Hand-in-Hand Trust Corporation Inc.

Two of these member firms, Beharry Stockbrokers Ltd and Hand-in-Hand Trust Corporation Inc. are also members of the Board of Directors of GASCI.

The Guyana Securities Council (GSC), a statutory body created by the Securities Industry Act,has oversight authority of the securities market. It will be renamed the Guyana Securities Commission.

The Securities Commission will be responsible for advising the Minister of Finance on all matters relating to securities; maintaining surveillance over the securities market and ensuringthe orderly, fair and equitable dealings in securities; registering, authorizing or regulating, self-regulatory organizations, securities companies, securities intermediaries, brokers, dealers, traders, underwriters, issuers and investment advisers; and controlling and supervising their activities with a view to maintaining proper standards of conduct and professionalism in the securities business; protecting the integrity of the securities market against abuse arising from the practice of insider trading; and creating and promoting such conditions in the securities market as it may seem necessary, advisable or appropriate to ensure the orderly growth and development of the capital market.

Under the proposed reforms, the Securities Act will be rewritten to address improved licensing regimes for self-regulatory organizations, securities exchanges and securities intermediaries; extend the regulatory authority of the Securities Commission over the entire securities marketplace, including the quotation and trade reporting systems and alternative trading schemes; and instituting  a licensing regime for collective investment schemes.

It is hoped that the new Securities Act will ensure the independence of the operations of GASCI, to ensure there is no room for collusion and price fixing. Typically, the price of tradeable securities should be set by open market operations, based on individual company fundamentals and supply/demand dynamics.

With automation, it is anticipated that a platform based system will be implemented, wherein brokers are electronically connected to the stock exchange, the payments system and the proposed central depository for securities.

With the establishment of a central depositary, existing paper certificates will be dematerialized and converted to electronic records with unique identifiers, enabling more efficient trading and settlement. This should lead to a more liquid stock market on which trades can be executed intra-day on a daily basis, instead of the current weekly period.

Clients of brokers should also be able to access their brokerage accounts on-line and execute buy/sell orders on demand.

Automation will not only facilitate greater operational efficiency but will also allow for better reporting, greater transparency, improved regulatory controls. In a modern exchange, regulatory controls are embedded into the automated processes, leaving an auditable trail of all transactions.

It would be necessary to have a high level of security to prevent cyberattacks and unauthorized access at all levels of automated processes, including the stock exchange itself as well as brokers.

The current Securities Act does not adequately prescribe penalties for regulatory infractions and non-compliance; or describe qualifications for registered participants in the market. This would be necessary in the rewritten act if the market is build trust with investors.

If the market is to attract foreign investors, listed companies will have to meet internationally accepted guidelines for accounting, shareholder rights, corporate governance, reporting, and conflict resolution. It would also be prudent to establish rules for foreign investors.

On average, the securities listed on the GSE are currently undervalued based price/earnings (P/E) metrics, compared to current valuations in other frontier markets. This indicates the potential for prices to rise, although P/E ratios are not the only indicator of valuation (See Table)


Stock Symbol Earnings Per Share ($) Price Earnings Ratio Dividends Paid Last 12 Months Dividend Yield    (%)
DIH 4.44 10.10 1.04 2.30
CCI 0.95 9.50 0.22 2.40
CBI 12.21 11.80 2.70 1.90
DBL 3.55 10.10 1.10 3.10
DDL 3.02 9.30 0.67 2.40
DTC 65.36 13.80 62.71 7.00
BTI 41.84 10.30 15.00 3.50
GSI 1.91 10.50 0.00 0.00
JPS 8.01 2.50 2.50 12.50
PHI -0.19  n/a 0.00 0.00
RBL 9.13 16.40 4.11 2.70
RDL -24.01  n/a 0.00 0.00
SPL 9.38 18.10 6.00 3.50

As at December 31, 2017

However, while domestic investors might be comfortable with investing in local corporate bonds and government securities, foreign investors pay attention to factors such as a country’s and individual corporation’s credit rating, as well as currency stability. Guyana does not currently have a global credit rating.

The government anticipates a broadening of the market to include fixed income securities and additional equity issuers.  New securities listings may come in the form of initial public offerings by private companies seeking to go public. Arguably, one of the drawbacks of new listings is that Guyanese private corporations tend to be narrowly held and there appears to be a high degree of reluctance to diversify ownership.

On the fixed income front, there is potential for local corporations as well as the government to list bonds on the GSE, primarily for investment by domestic investors. For foreign investors to invest in local corporate bonds, it will become necessary for their bonds to be rated by a reputable credit agency, while government bonds will require a country rating.

New securities listings may come in the form of initial public offerings by private companies seeking to go public. Arguably, one of the drawbacks of new listings is that Guyanese private corporations tend to be narrowly held and there appears to be a high degree of reluctance to diversify ownership.


It will take a change in the mindset of local corporations to go public. Such change could be facilitated by GASCI educating local companies of the benefits of a public listing.  Educating the local population of the benefits of investing in the markets could support higher levels of domestic investments.

It will take time for Guyana to modernize its securities market infrastructure. But for now, the government is on the right path.

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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Guyana, a frontier market in the making

Seeking to modernize securities sector

Part 1 of 2

Recognizing that its’ stock market can play a crucial role in the country’s economic development the Guyana government has announced plans to establish a modern capital markets infrastructure and revamp its regulatory regime.

If the country successfully implements its plans, it could achieve frontier market status in the near future – in similar vein to two other Caribbean countries, Trinidad & Tobago and Jamaica which are stand alone countries on the MSCI Frontier Markets Index.

While the Guyana Stock Exchange (GSE) was established in 1993, this is the first time any government has seriously considered its potential role in economic development and taken steps to modernize its infrastructure to keep pace with the rapid development of viable stock markets in more than 35 developing countries around the world.

Incidentally, the GSE was established in accordance with the objectives of the IMF’s Guyana Poverty Reduction Strategy, with the aim of encouraging and/or supporting the private sector to raise local financing for investment. At that point in time the country was overburdened by debt and its recovery was being supervised by the IMF.

Essentially, stock markets play a major role in mobilizing capital for corporations as well as governments to support their development initiatives. They also provide domestic investors with the opportunity to invest in listed securities and benefit from potential gains over time as the companies in which they invest grow.

As well, stock markets can be an attractive source of foreign investors who typically seek attractive investments outside their own borders. In the process, they can provide domestic companies with capital to grow their businesses.

Guyana currently has a small, underdeveloped and relatively illiquid stock exchange, with 16 listed companies which had total market capitalization of GYD$166.2 billion or approximately US$810 million at the end of December 2017.

Since it was established in 2003, the market capitalization of the index has grown by more than 800%, and experienced only three years of moderate decline between 2014 and 2016 (See Table). This means that the listed companies have experienced healthy growth in their stock prices and investors in these companies would have made substantial capital gains, depending on when they invested in individual stocks.

In global terms, Guyana would be classified as a frontier market, that is, markets that are emerging but are not yet classified as emerging markets. Generally, frontier markets are illiquid, have a small number of listed companies and are undercapitalized.

More importantly, their regulatory, legal, disclosure, reporting and trading infrastructure is still evolving, making investment decisions challenging and difficult for global investors. That’s why, unlike developed markets, frontier markets are often categorized as a brave new world for investors willing to take the risk of investing in countries whose stock markets are now at a formative stage of development.

Arguably, while the risk of investing in these markets is greater, the rewards can be significant. Typically, investors who invest in frontier markets like Guyana benefit from what is referred to as the “first mover’s advantage,” that is, they get in when stocks are relatively undervalued and hold their investments for the long-term with the objective of realizing significant gains.

Incidentally, the GSE is well positioned to attract a flood of local and foreign investors should the government successfully implement its plans to modernize its capital market infrastructure.

In its 2018 budget, presented last November, the government noted that a limited number of financial instruments are traded on the GSE and that there are only a small number of participants in the market.

Currently, securities traded on the GSE are all equities and the government hopes to diversify its listings to include equity as well as debt securities. It hopes to develop a bond market and is awaiting the submission of an IMF report.

Typically, tradable bonds may be issued by the government as sovereign bonds or by large domestic corporations.

For foreign investors, bonds may be issued in local or foreign currency, usually the US dollar, British pound or some other major currency. In the global arena, there is a growing tendency for developing markets to issue local currency bonds which reduce the risk of a run on the currency, thereby facilitating currency stability and minimizing systemic risk.

However, while domestic investors might be comfortable with investing in local corporate bonds and government securities, foreign investors pay attention to factors such as a country’s and individual corporation’s credit rating and currency stability. Guyana does not currently have a global credit rating.

Beyond the issue of high-yielding sovereign bonds as a component of its proposed Sovereign Wealth Fund, and the listing of local government securities, it is believed that equity securities will continue to dominate the GSE for years to come. Notwithstanding, there is potential for local corporations to list bonds on the GSE, primarily for investment by domestic investors.

New securities listings may come in the form of initial public offerings by private companies seeking to go public. Arguably, one of the drawbacks of new listings is that Guyanese private corporations tend to be narrowly held and there appears to be a high degree of reluctance to diversify ownership.

In setting the stage for its modernization plans, the government recognizes that the legal and regulatory framework governing the operation of the securities sector has not kept pace with developments with global best practices.

As a result it plans to introduce a modern and comprehensive legislative framework to improve the regulatory regime, enhance investor protection and strengthen cross-border supervision and cooperation among financial regulators, in order to reduce systemic risk.

This will involve rewriting the Securities Industry Act (SIA) by the Guyana Securities Council. According to the budget, the new SIA will address the following areas:

  • Improved licensing regimes for self-regulatory organisations, securities exchanges and securities intermediaries;
  • Extension of regulatory authority over the entire securities marketplace, including quotation and trade reporting systems and alternative trading schemes;
  • Institution of a licensing regime for collective investment schemes;
  • Establishment of a Central Securities Depository to record and maintain securities and register the transfer of ownership of securities; and
  • Conferral on the regulator (to be renamed the Securities Commission) of such powers and duties as would enable it to promote the orderly development of the securities market and to protect the integrity of the market from abuse.

Evidently, Guyana’s plans to modernize its securities markets infrastructure and its regulatory regime can put the country on the map to become a tradable market for investors globally.

Dwarka Lakhan

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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Limiting the risk of investing in emerging markets

Multinational companies with significant operations in emerging markets provide a safer alternative to the stocks of local companies

Clients who want to benefit from the growth potential of emerging markets but cannot endure the volatility associated with investing directly in these markets could look to invest in the stocks of developed-market multinational corporations that have successful operations in the developing world.

These companies, which increasingly seek to leverage business opportunities in emerging markets, derive a significant portion of their revenue from these markets, which contribute directly to their bottom lines.

Many developed-market companies find emerging markets attractive because of their strong economic growth, favourable demographics, rising middle class, increasing domestic consumption and growing adoption of technology. The International Monetary Fund forecasts that emerging-market economies, which currently account for 75% of global gross domestic product (GDP) will grow by 4.9% in 2018 compared with 2.5% for developed-market economies; by 2020, emerging markets will be growing more than twice as fast as developed markets, at 5.1% vs 1.7%, respectively.

Indeed, developed-market companies are experiencing slower growth in their home markets and see the potential “for double-digit growth rates over multiple years” in emerging markets, says Matthew Strauss, vice president and portfolio manager with CI Investments Inc. in Toronto. In addition, the population of emerging markets is almost 90% of the world’s population, providing an immense market for expansion.

The amount of emerging-market exposure investors could get by investing in equities of developed-market companies depends on the proportion of the companies’ profits that are derived from emerging markets and by how much such profits contribute to their growth.

Developed-market companies included in the MSCI world index derived 21% of their revenue, on average, from emerging markets, according to a 2014 MSCI Inc. report entitled Economic Exposure in Global Investing. North American companies on the index — such as Exxon Mobil Corp., Inc., Apple Inc., Microsoft Corp., Facebook Inc., JP Morgan Chase & Co., and Johnson & Johnson — derived 16% of their revenue, on average, from emerging markets. And European companies — such as Nestle SA, Novartis International AG, Roche Holdings AG, HSBC Holdings PLC and Royal Dutch Shell PLC — earned 27% of their revenue from emerging markets.

Many companies — such as Netherlands-based Airbus Group NV, U.S.-based Colgate Palmolive Co., Germany-based Henkel AG, U.S.-based Mondelez International Inc., Switzerland-based Nestle and Netherlands-based Unilever NV — have a much higher revenue exposure to emerging markets than the average, in the range of 40%-60%.

“Some multinational corporations are more successful than others,” says Christine Tan, associate vice president and portfolio manager with Sun Life Global Investments (Canada) Inc. in Toronto. This is especially the case for Unilever and Colgate Palmolive, consumer goods companies that have decades of experience in emerging markets and are leaders in their respective space in markets such as India and Latin America.

The MSCI report notes that although “some companies may have high international revenue exposures, their revenue might be concentrated in a handful of countries.” For example, U.S.-based consumer discretionary company Yum! Brands Inc. had 77% revenue exposure to international markets in 2014, but 53% of its revenue was derived from China alone, exposing Yum! to the peculiarities of a single market. But many multinationals have exposure to a range of different countries and are consequently not subject to country specific risks.

From a client’s standpoint, investing in these companies just for the sake of getting exposure to emerging markets, may result in missing out on opportunities that direct plays in emerging markets offer. But while developed-market companies might be less volatile, “investors will miss out on the extra tailwind” they can get from investing directly in emerging-market equities, says Arup Datta, senior vice president and head of Mackenzie Investments global quantitative equity team in Boston.

Although emerging-market equities can be volatile, their long-term growth generally is higher than developed-market equities, says Tan, making these stocks a better direct investment.

In addition, some developed-market multinationals have had a successful track record in growing their revenue and profitability in emerging markets, others have found it more challenging, reducing their growth potential.

In some ways, that’s because local companies are beginning to compete head-on with multinationals, Tan says, forcing them to add local content or to partner with domestic companies to gain market share.

For example, companies such as McDonald’s Corp., Starbucks Corp. and Yum!-owned KFC have had to either partner with local companies or change their menu options to adapt to local conditions or to compete with domestic companies, she says.

Thus, it’s no longer smooth sailing for multinationals as emerging markets mature, especially in regions such as Asia, “where there is little opportunity for growth left,” Tan contends.

Clients must recognize that multinationals’ spending in emerging markets actually can result in losses and, therefore, might not be good investments in lieu of emerging-market exposure, Strauss says. Conversely, successful emerging-market companies may reinvest their profits in those regions to support their expansion.

Strauss cautions that investing in developed-market multinationals to get emerging-market exposure in a world that was moving toward globalization was less a risk than in the current environment, in which trade protectionism is more prevalent. Consequently, it might be better to invest in emerging-market companies based locally to get exposure to emerging markets.

At the other end of the spectrum, the risks and inefficiencies inherent in emerging markets will remain, making developed-market multinationals safer bets, with less volatility, says Datta. But it all comes down to the unique risk profile of clients, who must find a balance between investing directly in emerging-market equities and investing in developed-market multinationals to gain indirect exposure to emerging markets.

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Beyond our borders

Many investors, including HNW clients, need to be educated about the world of opportunity in global markets


Many investors, including HNW clients, need to be educated about the world of opportunity in global markets

Running up against the preference of Canadian investors for their own country is nothing new: despite years of effort by the investing community, many still show a strong bias in favour of their own markets.

But there are signs this so-called “home country bias” is beginning to abate. While acknowledging that clients often are more comfortable investing in familiar companies, Ian Riach, chief investment officer at Fiduciary Trust Co. of Canada in Toronto, notes that global investing is beginning to resonate with more Canadian investors. Recognition that global markets offer far more opportunities than Canada does is more common now, he says. “It comes down to showing clients how narrowly focused the Canadian market is,” says Riach, adding that the discussion also should include the pros and cons of global markets. “[Clients] have to recognize the risks as well as the rewards.”

Annual performance of MSCI Canada index vs MSCI world index (C$)

However, if you expect your high net-worth clients to tolerate more offshore risk compared with other clients, you are likely to be disappointed. “There is not much difference in the way both sophisticated and less sophisticated investors view global investing,” Riach says. “A lot of people think that high net-worth investors are more sophisticated, but, in fact, they are more risk-averse.”

One of the best ways to overcome the bias, says Ron Fox, chairman and CEO of Glidepath Portfolio Services Inc. in Toronto, is to tell your clients that investments will be chosen on the basis of superior risk-adjusted rates of return. Fox, whose firm offers separately managed portfolios to high and ultra-high net-worth clients, constructs portfolios that aim to achieve specific objectives without regard to country selection. Most clients do not care about their asset mix, he says, if their investment objectives are achieved.

At the core of the issue with sticking to Canadian investments is the relatively narrow range of Canadian markets. With only three key sectors making up 68% of the public markets – financials, energy and materials – your stay-at-home clients will miss out on potential global growth opportunities in a range of robust industries, such as technology, health care, telecommunications, industrials and consumer staples.

Indeed, says Heather Holjevac, fellow of the Financial Planning Standards Council and senior wealth advisor with TriDelta Financial Partners Inc. in Toronto, staying too close to home can actually increase investing risks. When clients diversify globally, they are more likely to lower their investment risk, says Holjevac, by exposing their portfolios to a range of opportunities in which losses are offset by gains. This strategy, she notes, tends to provide a smoother ride in markets over time.

Riach notes that you should explain that by investing in a global portfolio that holds assets with low correlations, a client’s overall portfolio will tend to carry less overall risk than the weighted-average risks of the portfolio’s individual parts. This can lead to higher returns over time, and allow investment goals to be achieved more quickly.

One way to make these points with your clients is to use historical averages, which show how global markets have performed over time relative to the Canadian markets, says Holjevac. Model portfolios with different asset allocations also can be used to illustrate the benefits of global diversification within different scenarios.

Currency risks also need to be explained to clients who have decided to invest globally. Investing in stocks priced in a foreign currency can either increase or reduce portfolio returns, depending on market movements of both the Canadian dollar (C$) and the foreign currency. If, for example, a client invests in stocks priced in U.S. dollars (which currently trade at a premium of 30% over the C$), those stocks would have to gain more than 30% before the portfolio realizes a positive return in C$.

In addition, foreign investments priced in C$ may change in value independent of share levels. For example, if the C$ weakens against the currency of the investment’s foreign jurisdiction, the value of your client’s foreign investments as priced in C$ will increase (all other things being equal).

Some funds may hedge currency risk by using forward contracts or other derivative strategies to eliminate most of the risk associated with currency fluctuations. This strategy helps provide unitholders with returns closely related to the performance of the stocks held by the fund, independent of currency fluctuations.

Other funds may hedge currency risk only partially, or even not at all, on the assumption that currency movements even out over time.

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Emerging markets offer diverse opportunities

Demographic trends, a rising middle class and increasing domestic consumption are among the factors that make emerging market increasingly attractive to investors

Emerging markets are the future of global investing, according portfolio managers who specialize in these markets. Compared with their developed-market counterparts, emerging markets offer the opportunity to invest in a faster-growing and more geographically diverse range of countries and sectors, providing broader diversification and, potentially, greater risk-adjusted long-term returns.

Emerging markets make up about 14% of the MSCI all countries world index’s market capitalization. The classification includes 59 countries on the MSCI emerging and frontier markets index. By comparison, there are 24 developed markets on the MSCI world index.

Emerging markets can vary widely in size, with the stocks of six markets — China, South Korea, Taiwan, India, Brazil and South Africa — currently accounting for more than 75% of the weighting of the MSCI emerging markets index.

“Emerging markets represent one asset class that will continue to grow, that will not go backward,” says Matthew Strauss, vice president and portfolio manager with CI Investments Inc. in Toronto. As the economies of emerging markets continue to mature while their financial services sectors grow, they will create an increasing number of investment opportunities.

One of the key drivers of emerging markets is their rate of economic growth, which is much faster than that of developed markets. The International Monetary Fund estimates that the gross domestic product (GDP) of emerging markets for 2018 will grow at double the pace of developed markets: 4.9% for emerging markets vs 2.5% for developed markets. That gap is expected to widen, with estimated GDP growth of 5.1% in emerging market vs 1.7% in developed markets in 2020.

Emerging markets, as a result of their higher growth rate, account for 75% of global GDP growth, says Christine Tan, associate vice president and portfolio manager with Sun Life Global Investments (Canada) Inc. in Toronto.

Chetan Sehgal, senior managing director of Franklin Templeton Emerging Markets Equity in Singapore, a division of Franklin Templeton Investments Corp., suggests that emerging markets are benefiting from several factors, including “a supportive global macro backdrop, improving economic fundamentals, ongoing reforms, a favorable earnings outlook and attractive valuations.”

Emerging markets also are “better managed than in the past,” and the risk traditionally associated with investing in them has declined, says Arup Datta, senior vice president and head of Mackenzie Investments’ global quantitative equity team in Boston. Although emerging markets still areperceived as risky, he adds, that perceived risk is typically associated with higher long-term returns.

“The structural case for emerging markets continues to center on demographics, a rising middle class, domestic consumption and the growing adoption of technology,” Datta says.

Many countries also have benefited from “reformist, business-friendly governments that seek to reduce bureaucratic barriers to economic growth and encourage entrepreneurship,” he adds.

Tan points out that many emerging market countries have a rising middle class and a younger demographic, which can have a positive effect on their economies in the form of higher incomes, increased consumer spending and accelerated infrastructure development.

Sehgal adds that businesses in emerging markets are improving, as well.

“Emerging markets companies have undergone a significant transformation,” Sehgal says, “from the often plain-vanilla business models of the past, to a new generation of innovative companies that are moving into technology and higher value-added goods and services.”

Tan and Datta note that emerging markets are not a homogeneous asset class, and they are at various stages of development. “It would be a mistake to lump all emerging markets into a single asset class,” Datta says. “Some are mature, and some are early-stage.”

For example, Tan says, India has a relatively young population, which has contributed to strong growth in consumption. China, on the other hand, has an aging population that has resulted in higher consumer spending in areas such as health care and travel.

Strauss advises that when investing in emerging markets, you have to consider the region, the country and the sector. For example, Latin American markets and South Africa are endowed with natural resources and are most vulnerable to a decline in commodities prices.

Strauss notes that changes in commodities prices can affect different emerging markets in different ways. “Lower oil prices, for example, are bad for producers,” he says. “Higher prices are bad for net importers such as Turkey and India.”

But, Strauss adds, commodities are no longer a core theme when looking at emerging markets

Countries such as India and China, which are more reliant on exports, can be affected by a global downturn and by issues such as trade protectionism, which has reared its head under the Donald Trump administration in the U.S.

But most emerging-markets companies now also have a domestic component to their growth, Strauss says, and are becoming less reliant on exports.

Although commodities production and exports remain important to certain emerging-market economies, Strauss says, emerging markets have been shifting toward “new economy” industries, underpinned by innovation and consumption.

“Many investors continue to view commodities as the dominant driver of emerging markets,” Strauss says, “but we consider this a misperception.”

This is the first in a four-part series on investing in emerging markets.

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Prepare for the worst

You are required to have a plan in place should your business be disrupted by a natural or unnatural disaster, such as a storm, fire or cyberattack. Here are some ways to ensure you are prepared

Disasters both natural and man-made can happen at any time without warning, disrupting your financial advisory business operations and putting sensitive client data at risk of being lost or compromised.

Although you cannot prevent disasters from happening, you have a responsibility to be prepared for unexpected events such as hurricanes, tornados, floods, fires, systems failures, cyberattacks, terrorist attacks and other unpredictable events that can disrupt your ability to operate your business.

“Financial advisors must plan in advance to mitigate the effects of disruptions or, in certain cases, to minimize the likelihood of their occurrence,” says Subhas Fagu, partner with Techlicity Ventures Corp. in Toronto. “[Advisors] must have a sound understanding of the potential impact of any disruptive event and develop welldefined processes and procedures to deal with such events.”

Regulatory bodies such as the Ontario Securities Commission (OSC), the Investment Industry Regulatory Organization of Canada, the Mutual Fund Dealers Association of Canada (MFDA) and the Canadian Securities Administrators require that business continuity be an ongoing priority for investment industry participants. The regulators recognize the substantial risk that major disruptions can pose to the financial services sector and the potential for loss of confidence among investors.

To put the requirement for business continuity management into perspective, an OSC staff notice states that plans must incorporate a “whole-of-business approach that includes policy, standards and procedures for ensuring that specified operations can be maintained or recovered in a timely fashion in the event of a disruption.” The notice adds: “Effective business continuity management concentrates on the impact as opposed to the source of the disruption.”

Although business continuity planning and disaster recovery planning often are mentioned together and usually are covered in the same plan, the terms have slightly different meanings.

“Business continuity” refers your ability to keep your business up and running during a disaster and to get back to normal with as little disruption as possible after an event.

“Disaster recovery” refers to your ability to restore key data

necessary to run your business should your systems be damaged.

Both components of disaster planning are equally important.

In addition to requiring that you have both business continuity and disaster recovery plans in place, the OSC requires that you test your business continuity plans periodically. You also are responsible for ensuring that your thirdparty providers, such as back-office systems and cloud-storage

services, have adequate disaster recovery capabilities. And you must conduct reviews of the quality of any outsourced services. “[Advisors] must have some degree of contingency planning in place to be able to deliver the same level of service under adverse conditions,” says Des O’Callaghan, an independent business continuity management consultant in Toronto.

To begin with, he says, you must aim to prevent disruptions and, if they occur, “have the processes and capabilities in place to continue to operate or to recover as quickly as possible.”

Larger businesses may have more sophisticated plans, which are more costly to maintain and operate. But plans for smaller businesses, such as financial advisory practices, don’t have to be expensive, O’Callaghan says.

“Regardless of the size of the organization,” O’Callaghan says, “any business continuity measures must be cost-effective.”

The MFDA recognizes that differences in scale of operations should dictate the level of planning required. An MFDA staff notice states that firms must develop business continuity plans that are appropriate for their size and business model.

Still, cost can be a constraint for many advisors, says Montu Chadha, president of Applications On Network Inc., in Richmond Hill, Ont. Smaller businesses generally maintain the minimum requirements for business continuity and disaster recovery. “[These businesses] want to do more,” Chadha says, “but are faced with budgetary constraints.”

Many advisors may not have internal resources to prepare their plans and, consequently, must seek outside help.

“You have to start from somewhere,” Chadha says. “Have a practical budget and speak to someone who has done it before.”


Your integrated business continuity and disaster recovery plan must describe clearly the steps you and your team will take to deal with disruptive events. The plan must answer the following questions:

– What are your critical business functions? For example, do you maintain and conduct trades in client accounts? Do you hold personal client information?

– Do you have a list of contacts, including contact information for individuals with specific responsibilities in the event of an emergency?

– Have you identified an alternative site from which you can operate in case you don’t have access to your office?

– What are the other roles and responsibilities of your staff members in an emergency?

– Who is responsible for recovering client data following a disruptive event?

– Who are your third-party service providers, particularly those who handle your data?

– Where and how is your data stored?

– How can you access your stored data should an emergency happen?

– How quickly can you recover the data you maintain in order to continue serving your clients?

– What assurances do you have that you can recover your data readily?

– How frequently do you test your ability to recover your data?

“Planning involves intelligent thinking and doesn’t have to be terribly complicated,” O’Callaghan says. “You must establish priorities and emergency procedures in case of a disruption.”

Your plan is basically a series of “what if” scenarios for various occurrences.

Communicate your plan to your staff and update it regularly to reflect changes in your business operations, including system and service-provider changes.

From an operational standpoint, your plan must be tested periodically at least, annually to ensure that you can handle a disruptive event. Testing must be conducted in collaboration with third-party providers, such as your off-site back office or your data backup and storage site.

Some key considerations to take into account:


Business disruptions can come in different shapes and sizes, Fagu says. For example, the challenges of continuing to operate your business after a fire would be different from working through a cyberattack.

In the case of fire, you might have to find new premises at least, temporarily and replace computers and other equipment.

After a cyberattack, you must take steps to recover data and deal with systems security and software issues, such as firewalls and virus protection.

That is why you have to conduct an analysis of all potential threats.

“You must have some awareness of what can happen,” O’Callaghan says, “and some kind of emergency plan to deal with the resulting disruption.”

Consider the types of events that are most likely to occur in your operating environment, Chadha says. For example, depending upon your geographical location, you may be unlikely to experience an earthquake or a tornado, but might need to deal with a flood or a sustained power outage.


Whatever the source of the potential disruption, you must analyze how it will affect your infrastructure, Chadha says.

Fagu adds that you will need to identify and prioritize business functions that must be recovered in case of an emergency.

One of the most important components of a financial advisory business is its technology infrastructure. The infrastructure maintained by your third-party service providers is equally important.

You must ensure that your computer systems are configured in such a way that you can recover important data and client records quickly and easily.

You must be able to validate the recovery capabilities for your information through regular testing, Fagu adds.


Storing and backing up data are important elements of both business continuity and disaster recovery.

“There is a real cost, as well as time and effort, associated with data storage and backup,” Chadha says. So, you should back up only data that are critical to your operations.

To make this distinction, you must categorize data based on relative importance, he says. This step would make recovery of key data in an emergency easier. Access to marketing materials, for example, would not necessarily be as critical for business continuity as applications and client data are.

Generally, data can be backed up locally, off-site, remotely or in the cloud. Each method has advantages and disadvantages. “There is no single solution,” Chadha says.

Smaller businesses, Fagu says, often back up and store data on their own servers, external hard drives or USB drives. Alternatively, third-party servers, which are convenient and relatively inexpensive, could be used.

However, Chadha cautions, data backed up on portable drives are susceptible to corruption and can be lost or exposed to unauthorized access if they’re not encrypted.

“A lot of companies back up data, but often can’t recover [the data] when required,” Chadha says, “because the tools [aren’t there].”

For example, you may not have the software to recover certain accounting records. So, you must ensure that you have the ability to recover your data on demand.

Chadha recommends using an automated system for storage and backup that is available and accessible at all times.

Cloud storage is one solution. “When you use the cloud,” Chadha says, “your data can be accessed at any time from multiple locations, enabling easy recovery.”

However, he cautions, cloud storage can be costly and you must select your provider with care. Also, your data will be in “somebody else’s hands” and may be subject to security threats.


In the event of a disruptive event, you must determine how you and your staff will continue to do your jobs and how you will communicate with clients and service providers.

You also must establish who is responsible for managing the business continuity and disaster recovery plan.

“In the case of smaller advisory businesses,” Fagu says, “the owner would most likely have to take control.”

For larger businesses, staff must be assigned key responsibilities, together with alternates in case the primary staff member is not available. You also must establish a platform and methods for communicating with clients, third parties and staff if your existing infrastructure is not available.

For many advisors, the requirements for business continuity and disaster recovery planning might appear quite onerous. But, from a regulatory standpoint, you have an obligation to have a plan.

“Just think about your own business model,” Fagu says, “and what you would do if disaster strikes.”