The World Economic Forum (WEF) recently released its annual “Global Competitiveness Report,” which details the strengths and weakness of 144 countries in myriad factors including education, infrastructure, health and technology. There aren’t many huge surprises in the developed markets, as most countries’ overall rankings were fairly stable from the prior year. There were, however, a few interesting shifts in the ranks among emerging markets: some making leaps forward and others regressing. Although we are bottom-up investors and make investment decisions on a stock-by-stock basis – regardless of rankings like this – it is interesting to examine the overall environment for doing business, and the potential sticking points a particular company in a particular country may be facing.
Mark Mobius: the 12 pillars of global competitiveness
The WEF’s Global Competitiveness Report outlines “12 pillars” that are the core of its analysis:
- Macroeconomic Environment
- Health and Primary Education
- Higher Education and Training
- Goods Market Efficiency
- Labor Market Efficiency
- Financial Market Development
- Technological Readiness
- Market Size
- Business Sophistication
The report then drills down to examine data within each pillar – for example, within the “Institutions,” pillars are measures including the burden of government regulation, business costs of crime and violence, protection of minority shareholders’ interests and property rights. Within the “Goods Market Efficiency” pillar are prevalence of trade barriers, prevalence of foreign ownership and number of days to start a business, to name a few. As investors, these are areas of particular interest to us. In many cases, what is perhaps more important than the actual barriers to doing business is how a particular business copes with them. For example, the reliability of power is a big problem in parts of Africa so many companies will have their own power source – through a generator. Mobile phones help circumvent the need for physical infrastructure such as landlines or brick-and-mortar bank branches and retail stores, reaching consumers in farflung locations in new ways.
Khrom Capital was up 32.5% gross and 24.5% net for the first quarter, outperforming the Russell 2000's 21.2% gain and the S&P 500's 6.2% increase. The fund has an annualized return of 21.6% gross and 16.5% net since inception. The total gross return since inception is 1,194%. Q1 2021 hedge fund letters, conferences and more Read More
Mark Mobius: Breaking down the competitiveness rankings
The top of the WEF’s global competitiveness list was fairly stable among the developed country ranks. What is interesting from my perspective is the movement among emerging and even lesser-developed frontier market countries. Algeria, a frontier market, moved up 21 places to 79 from 100 last year. Generally speaking, we are excited about the prospects for frontier markets, particularly in Africa, and find the upward climb encouraging. The European frontier market of Romania moved up to 59 from 76 in 2013. The emerging markets of Indonesia, China and Russia also moved up in the global competitiveness ranks while on the flip side, Brazil, Turkey, South Africa and India all dropped in the rankings. Let’s take a look at a few of these countries making moves in 2014 in more detail.
Mark Mobius: Romania
Romania has made progress on a number of fronts, and it’s not a big surprise to us to see that the country has improved in global competitiveness. Romania weathered the sovereign debt crisis that hit the eurozone a couple of years ago, as well as the more recent tensions between Ukraine, Russia and the West. In the first quarter of 2014, Romania’s GDP rose 3.8% on a year-over-year basis, making it one of the fastest-growing economies in the European Union (EU).2 While the second quarter 2014 growth figures were a little softer at 1.4%, Romania’s growth still outpaced the EU at large.3 Domestic demand has been aiding this growth spurt, and an increase in the minimum wage in January has played a part in boosting consumption.
I think Romania’s compliance with the International Monetary Fund (IMF) in the past few years has been beneficial and brought stability for public financing. We also see some positive developments in Romania in general; unemployment and interest rates are currently low, and disposable income is growing. That said, progress has been slow, and local consumption had been very depressed since 2008 and is just now starting to recover. Romania has made strides forward, but we think it still has a ways to go to become even more competitive globally. People were not really spending so we think domestic demand is where the next growth engine of Romania could come from, on top of increased industrial production and exports.
We are managing the country’s largest investment fund, Fondul Proprietatea, investing in a wide variety of Romanian industries. This fund was established to compensate those who lost their properties during the Communist period. Shares of a wide variety of government companies were injected into the fund. It has been our job to help bring those companies into profitability by working with the managements and government to institute reforms in line with a market economy. When we took over management in September 2010, we first worked to get the fund listed on the Bucharest Stock Exchange, making it the largest listed fund on that exchange.
As investors in Romania, we pay close attention to the implementation of proper corporate governance standards, and we believe it’s essential for state-owned companies to become more competitive and profitable. Romania’s government is also considering the sale of more shares in state-controlled companies, which we view as positive. We have observed that good corporate governance usually leads to market performance, and should benefit shareholders and the country.
Mark Mobius: Indonesia
Indonesia held its presidential election in July, and there’s hope that new leadership will help ignite positive change and boost investor sentiment in Southeast Asia’s largest economy, akin to what we have seen in India. Jakarta Governor Joko Widodo emerged victorious, although not without a bit of controversy, including a court challenge of the results. Similar to the case of India, we’ve seen a positive market reaction, at least in the post-election glow.
See full here