emerging markets for dummies

Ann C. Logue, MBA
Author of Hedge Funds For Dummies
and Day Trading For Dummies
Learn to:
• Understand emerging markets and their
place in our economy
• Incorporate these growth areas into
y
our business and inve
stment plans
• Add foreign stocks to diversify
yo
ur p
ortfolio
Emerging
Markets
Making Everything Easier!
™
Open the book and find:
• What emerging markets offer
• How to weigh challenges, risks,
and opportunities for return
• The potential payoffs in
emerging markets
• Worldwide opportunities from
Botswana to Vietnam (and every-
where in between)
• The influence of political systems
in emerging markets
• How to protect yourself from
corruption

• Legal pitfalls to avoid
Ann C. Logue, MBA, is a finance writer who has written for Barron’s, MSN
Money, Newsweek Japan, and Wealth Manager. A lecturer at the Liautaud
Graduate School of Business at the University of Illinois at Chicago, she is
the author of Hedge Funds For Dummies and Day Trading For Dummies.
$24.99 US / $29.99 CN / £17.99 UK
ISBN 978-0-470-87893-4
Business & Economics/General
Go to Dummies.com
®
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Branch out into
emerging markets and
diversify your portfolio
In this global economy, it’s important to understand the
power that other countries possess and how they can affect
the global market and your investment portfolio. Emerging
Markets For Dummies gives you the information you need to
understand emerging market nations and their place in our
local and global economies.
• Emerging markets 101 — get the 4-1-1 on the basics of emerging-
market investing and the essentials on risk, return, and
investment potential
• Go global — discover the geography of the world’s emerging
markets (big and small), from the practically mature to the
relative babies
• Find the growth — look for changes in demographics, market
regulation, and technology in emerging markets to generate
higher investment returns than you may be able to find at home

• Check the climate — find out the key issues surrounding politics,
trade, and natural resources that create both risk and opportunity
in emerging markets
• Start investing — make smart portfolio decisions with priceless
information on how to buy and sell, where to look, and what to
watch out for as you dip into emerging-market investments
Emerging Markets
Logue
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Spine: .72"
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Emerging
Markets
FOR
DUMmIES
‰
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01_9780470878934-ffirs.indd ii01_9780470878934-ffirs.indd ii 11/30/10 11:23 AM11/30/10 11:23 AM

by Ann C. Logue, MBA
Emerging
Markets
FOR
DUMmIES
‰
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Emerging Markets For Dummies
®
Published by
Wiley Publishing, Inc.
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Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2011 by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
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About the Author
Ann C. Logue, MBA is the author of Hedge Funds For Dummies, Day Trading For
Dummies, and Socially Responsible Investing For Dummies. She has written for
Barron’s, MSN Money, Newsweek Japan, and Wealth Manager. She is a lecturer at
the Liautaud Graduate School of Business at the University of Illinois at Chicago.
Her current career follows 12 years of experience as an investment analyst.
She has a BA from Northwestern University and an MBA from the University of
Chicago, and she holds the Chartered Financial Analyst designation.
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Dedication
To Rik and Andrew, who like to travel to emerging markets.
Author’s Acknowledgments
I’m grateful to the many people who gave me ideas, shared information, or
helped me with the research for this book, including Paul Davis Bowden of
HSBC, Marc Chandler of Brown Brothers Harriman, Aakash Chudasama, Dan
Harris of Harris & Moure, Dimitri Kryukov of Verno Investment Management,
Ross Moore and Mario Rivera of Colliers International, Rodrigo Puello, Peg
Reed of Interbank FX, Carrie Schloss, Tariq Shaikh, Dennis Shin, Farrah
Siganporia, Daniel Suddes, Rees Warne, Todd Warren, Peter Woike, and Nigel
Yin. Thank you, everyone, for your help.
I had visions of a whirlwind tour of 50 nations to research this book, but
the deadlines kept me at home. Instead, the world came to me through the
Richard J. Daley Global Cities Forum at the University of Illinois at Chicago
and through conferences organized by the University of Chicago Booth
School of Business’s African Business Group and South Asia Business Group.
As for the mechanics of putting together the book, editors Stacy Kennedy,

Elizabeth Rea, and Todd Lothery of John Wiley & Sons were great to work
with. Finally, my agent, Marilyn Allen, made it all happen again.
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Publisher’s Acknowledgments
We’re proud of this book; please send us your comments at .
For other comments, please contact our Customer Care Department within the U.S. at 877-762-2974,
outside the U.S. at 317-572-3993, or fax 317-572-4002.
Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and
Media Development
Project Editor: Elizabeth Rea
Acquisitions Editor: Stacy Kennedy
Copy Editor: Todd Lothery
Assistant Editor: David Lutton
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Cover Photos: © iStockphoto.com/ktsimage
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Indexer: BIM Indexing & Proofreading Services
Publishing and Editorial for Consumer Dummies
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Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies
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Kelly Regan, Editorial Director, Travel

Publishing for Technology Dummies
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Composition Services
Debbie Stailey, Director of Composition Services
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Contents at a Glance
Introduction 1
Part I: The Basics of Emerging-Market Investing 7
Chapter 1: An Overview of Emerging-Market Investing 9
Chapter 2: Targeting the Unique Investment Potential of Emerging Markets 19
Chapter 3: Weighing Challenges, Risks, and Opportunities
for Return in Emerging Markets 33
Chapter 4: Understanding Accounting and Corporate Governance Abroad 45
Par t II: The Geography of Emerging Markets:
Regions and Regimes 59
Chapter 5: Non-BRIC Emerging Markets 61
Chapter 6: Building with the BRICs: Brazil, Russia, India, and China 79
Chapter 7: Markets on the Economic Frontier 99
Part III: For Better or for Worse: Factors Affecting
Emerging-Market Investments 123
Chapter 8: The In uence of Political Systems 125
Chapter 9:The Case of Corruption 145
Chapter 10: Considering Natural Resources 157
Chapter 11: Meeting the Needs of New Consumers 171
Chapter 12: Laws Affecting Outside Investors 187
Chapter 13: Currency and Exchange Rates 201
Part IV: Getting in the Game: Ways to
Invest in Emerging Markets 215
Chapter 14: Picking Bonds and Stocks in Emerging Markets 217

Chapter 15: Diversifying with Mutual Funds and Exchange-Traded Funds 235
Chapter 16: Stashing Your Cash in Emerging-Market Banks 249
Chapter 17: Real Estate around the World 261
Chapter 18: High Finance: Hedge Funds, Venture Capital, and Private Equity 273
Chapter 19: Micro nance and Peer-to-Peer Lending 285
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Part V: The Part of Tens 297
Chapter 20: Ten Up-and-Coming Emerging Markets 299
Chapter 21: Ten Tips for Emerging-Market Investors 303
Chapter 22: Ten Traps to Avoid When Investing in Emerging Markets 309
Appendix 315
Index 321
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Table of Contents
Introduction 1
About This Book 1
Conventions Used in This Book 2
What You’re Not to Read 2
Foolish Assumptions 3
How This Book Is Organized 3
Part I: The Basics of Emerging-Market Investing 4
Part II: The Geography of Emerging Markets: Regions and Regimes 4
Part III: For Better or for Worse: Factors Affecting
Emerging-Market Investments 4
Part IV: Getting in the Game: Ways to Invest in Emerging Markets 4
Part V: The Part of Tens 5
Icons Used in This Book 5
Where to Go from Here 5

Part I: The Basics of Emerging-Market Investing 7
Chapter 1: An Overview of Emerging-Market Investing . . . . . . . . . . . . .9
De ning Emerging Markets 10
Appreciating What Emerging Markets Offer 10
Great growth opportunities 11
Uncorrelated returns 11
New technologies 12
New markets 12
The Big Categories of Investment 13
Securities 13
Foreign direct investment 14
Pairing Investing and Economic Development 14
Starting new businesses 15
Engaging on a world stage 15
Contributing to economic development versus direct aid 15
Risk Considerations for Emerging-Market Investors 16
Political and social risk 16
Corruption 17
Currency risk 17
Liquidity risk 18
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Emerging Markets For Dummies
xii
Chapter 2: Targeting the Unique Investment
Potential of Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Examining Markets from an Investment Perspective 20
Developed markets 20
Emerging markets 21
Frontier markets 22

All the rest 23
Considering nations’ membership in the OECD and beyond 24
Finding Key Opportunities for Investment in Emerging Markets 26
Leapfrogging technologies 26
Growing the middle class 29
Better trade opportunities 30
Chapter 3: Weighing Challenges, Risks, and Opportunities
for Return in Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
The Basics of Risk and Return 34
Asset Correlation and Diversi cation 34
Complications from contagion 35
Problems with prices 35
The Potential Payoff in Emerging Markets 36
Seeing rapid growth as the market emerges 37
Finding opportunities in new technology,
new materials, and new ideas 37
Counting on currency 38
Recognizing Special Risks in Emerging Markets 38
Political risk 39
Social risk 39
Information problems 40
Liquidity 41
Maximizing Opportunities and Managing Risks in Emerging Markets 42
Doing your homework 42
Using intermediaries or advisors 43
Diversifying your investments 43
Chapter 4: Understanding Accounting
and Corporate Governance Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Keeping Track of the Money 46
Transparency and fair valuation 46

Taxation 47
Choosing an Accounting Method 48
Considering local laws 48
Selecting a stock market 48
Making themselves look good 49
Comparing Accounting Systems 50
U.S. GAAP 50
International Financial Reporting Standards 52
Regional conventions 53
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xiii
Table of Contents
Factoring Corporate Structure into Your Assessment 54
Getting into Governance Issues 55
Investigating the board of directors 55
Assessing executive compensation 56
Corralling the controlling investors 56
Identifying protections for minority investors 57
Looking for corporate social responsibility 57
Par t II: The Geography of Emerging
Markets: Regions and Regimes 59
Chapter 5: Non-BRIC Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . .61
Exploring Eastern and Southern Europe 61
Czech Republic 62
Hungary 63
Poland 63
Turkey 64
Moving into the Middle East and North Africa 65
Egypt 66

Morocco 66
Navigating North and South America 67
Chile 67
Colombia 68
Mexico 69
Peru 70
Stopping in South Africa 70
Finding the Action in Asia 72
Indonesia 72
Malaysia 73
Philippines 74
South Korea 75
Taiwan 76
Thailand 76
Chapter 6: Building with the BRICs: Brazil, Russia, India, and China. . .79
What Makes the BRICs? 79
Burgeoning Brazil 81
Industries 81
Opportunities 82
Assessment of risks 84
Running with Russia 85
Industries 86
Opportunities 87
Assessment of risks 88
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Emerging Markets For Dummies
xiv
Investing in India 89
Industries 90

Opportunities 91
Assessment of risks 92
Checking Out China 93
Industries 94
Opportunities 95
Assessment of risks 96
Chapter 7: Markets on the Economic Frontier . . . . . . . . . . . . . . . . . . . .99
Alighting in Africa 100
Botswana 100
Ghana 101
Kenya 102
Mauritius 102
Nigeria 103
Seeking South America and the West Indies 104
Argentina 104
Jamaica 105
Trinidad and Tobago 105
Emerging Eastern and Southern Europe 106
Bulgaria 106
Croatia 107
Estonia 108
Kazakhstan 108
Lithuania 109
Romania 110
Serbia 111
Slovenia 112
Ukraine 112
Making It in the Middle East and North Africa 113
Bahrain 114
Jordan 114

Kuwait 115
Lebanon 115
Oman 116
Qatar 117
Saudi Arabia 117
Tunisia 118
United Arab Emirates 119
Assessing Asia 119
Bangladesh 120
Pakistan 120
Sri Lanka 121
Vietnam 122
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xv
Table of Contents
Part III: For Better or for Worse: Factors
Affecting Emerging-Market Investments 123
Chapter 8: The Infl uence of Political Systems . . . . . . . . . . . . . . . . . . .125
Identifying Major Political Systems of Emerging Markets 126
Autocracy 127
Democracy 127
Socialism 128
Communism 128
Monarchy 129
Theocracy 129
A Who’s Who of Major Political Players 129
Going with elected or appointed government of cials 130
Keeping it in the family or dynasty 131
Recognizing the power of the people 131

Factoring in the labor sector 132
Considering the roles of NGOs 132
Acknowledging friends and enemies from other countries 133
Determining diaspora dynamics 135
Making the Most of the Market 135
Planning an economy’s direction 136
Collecting state revenues through taxes 137
Regulating for fun and pro t 137
Affecting the job market 137
Playing with In uential Pan-Governmental Organizations 138
Asian Development Bank 138
African Union 138
Commonwealth of Nations 139
European Union 140
International Monetary Fund 141
World Bank 141
World Trade Organization 142
Going It Alone: The Role of the Entrepreneur 142
Starting a business 142
Recruiting the best staff available 143
Sticking to the black market 144
Chapter 9: The Case of Corruption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145
De ning Corruption 146
Supply and demand 147
Bribes versus facilitation payments 147
Good or bad? Big or little? 148
Knowing What to Watch for: Creative Corruption 149
Blacklists 149
Black markets 150
Campaign and charitable contributions 150

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Emerging Markets For Dummies
xvi
Collusion 151
Overpriced goods 151
Phantom jobs 152
Understanding the Risk to Businesses 152
Fighting the Good Fight 153
OECD Anti-Bribery Convention 154
Transparency International 154
U.S. Foreign Corrupt Practices Act 155
World Bank 155
Protecting Your Emerging-Market Investments 156
Chapter 10: Considering Natural Resources. . . . . . . . . . . . . . . . . . . . .157
Natural-Resource Economics 101 157
Which countries are “cursed”? 158
Who gets the pro ts? 159
Who does the work? 160
Location, Location, Location 161
Resources and global trade 161
Infrastructure 162
Access to markets 162
Ways to Invest in Natural Resources 163
Buying stock in resource companies 163
Trading derivatives 164
Amassing your own inventory 165
Putting Your Resources into Natural Resources 165
Emerging markets, emerging energy 165
Mineral resources 167

Renewable resources: Trees and timber 168
Water, the emerging resource 169
Chapter 11: Meeting the Needs of New Consumers . . . . . . . . . . . . . .171
Digging into Demographics 172
Age distribution 172
Gender ratios 174
Migration, in and out 174
HIV/AIDS 175
Education 176
Finding the Gains from Trade 177
Internal markets 177
Export markets 178
Meeting Producer Demand, Inside and Outside the Country 178
Labor 179
Materials raw, materials cooked 179
Technology 180
Business services 180
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xvii
Table of Contents
Considering Consumer Demand at Home 180
Assessing people’s product needs and wants 181
Picking the right price 182
Making trade-offs between income and population 183
The Wide World of Trade 184
Low-end products for low-end markets 184
Low-end products for high-end markets 185
High-end products for high-end markets 185
Chapter 12: Laws Affecting Outside Investors . . . . . . . . . . . . . . . . . . .187

Sorting out Property Protections in Emerging Markets 188
Ironing out ownership rights 188
Separating possession from ownership 189
Transferring property 190
Considering Intellectual Property Rights 191
Taking Stock of Trading Restrictions 192
Restrictions on foreign ownership 192
Restrictions on short selling 193
Restrictions on leverage 193
Looking at Legal Structures in Emerging Markets 194
Statutory law 194
Common law 195
Regulation 196
Religious law 196
Concentrating on Contracts 197
Writing a good contract 197
Understanding standards of fairness 197
Obeying International Legal Standards 198
What laws apply? 198
Treaties for trading 198
World Trade Organization 199
International Court of Justice 200
Chapter 13: Currency and Exchange Rates . . . . . . . . . . . . . . . . . . . . . .201
Classifying Currency into Categories 201
Hard currency 202
Soft currency 202
Dollarized currencies 203
Rating Regional Currencies 203
The world’s regional currencies 204
Trade-only currencies 205

Managing Money the International Way 206
Quoting exchange rates 206
Trading currencies 207
Getting to the Bottom of Exchange Rates 207
Appreciation and depreciation 208
Pegged versus freely  oating exchange regimes 209
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Emerging Markets For Dummies
xviii
Imports and exports 209
Interest rates 210
In ation rates 210
Capital controls 210
Counting on Central Banks 211
Fiscal policy 211
Monetary policy 212
Seeing How Currency Affects Investments 212
Diversifying 213
Buying in your own currency 213
Using derivatives and forward contracts 213
Part IV: Getting in the Game: Ways
to Invest in Emerging Markets 215
Chapter 14: Picking Bonds and Stocks in Emerging Markets . . . . . .217
Looking at Bonds and Stocks in Emerging Markets 217
Boning up on risk and return 218
Using leverage and margin 218
Comparing bonds and stocks in both
emerging and developed markets 219
Pursuing Emerging-Market Bonds 221

Sorting out key bond categories 222
Matching bonds and currencies 223
Noting the effects of in ation on bonds 223
Dealing with default 224
Buying Emerging-Market Stocks 226
Calculating the  oat 227
Trading depository receipts 227
Opting for tracking stocks 228
Jumping on initial public offerings 228
Navigating International Securities Exchanges 229
Figuring out who’s regulating whom 229
Dealing with dual listings 230
Getting accurate price quotes 231
Considering Other Related Securities 231
Sharia-compliant contracts 232
Collateralized debt obligations 232
Credit default swaps 233
Chapter 15: Diversifying with Mutual Funds
and Exchange-Traded Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .235
Choosing Open-End Mutual Funds 235
Investment style 236
Research expertise 237
Fund family issues 238
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xix
Table of Contents
Figuring out fee structures 239
Share classes 241
Mutual funds and taxes 241

Exploring Closed-End Funds and Emerging Markets 242
Working with Exchange-Traded Funds 243
ETFs, both index and other 244
Buying ETFs 244
ETFs and fees 246
Drawbacks with ETFs in volatile markets 246
Evaluating Funds of All Types 247
Chapter 16: Stashing Your Cash in Emerging-Market Banks. . . . . . .249
Banking Basics 250
Seeing how banks make money 250
Exploring the emerging-market opportunity 251
Dropping banks into categories 252
Investing in Emerging-Market Banks 253
Opening a savings account 253
Purchasing currency mutual funds 254
Buying equity in the bank 254
Using Offshore Banking Centers 255
De ning Differences in Regulation 256
Bank capital limits 256
Deposit insurance 257
Anti–money laundering 258
Shining a Light on Sharia-Compliant Banking 259
Financing purchases 259
Deposit accounts 259
Chapter 17: Real Estate around the World. . . . . . . . . . . . . . . . . . . . . . .261
The Urbanization of the World 261
Earning Real Returns in Real Estate 262
Capital gains and stores of value 263
Income through rent 264
De ning Real-Estate Investments 264

Land 264
Buildings 266
Infrastructure 268
How to Invest in Real Estate 269
Land and buildings 269
REITs 269
Commercial and residential construction 270
Banking 271
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Emerging Markets For Dummies
xx
Chapter 18: High Finance: Hedge Funds,
Venture Capital, and Private Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .273
Delving into the World of High Finance 273
Comparing some common emerging-market partnership funds 274
Figuring out funds of funds 276
Looking into limited partnerships 276
Working with Local Partners 278
Governments 278
Local investors 279
Nongovernmental organizations 280
Avoiding Potential Traps in High Finance Investing 281
Transparency issues 281
Limits on liquidity 282
Governance in a limited partnership structure 283
Chapter 19: Microfi nance and Peer-to-Peer Lending . . . . . . . . . . . . .285
How Micro nance Works 286
Structuring small transactions 286
Using microcredit and banking services 287

Educating entrepreneurs for business success 288
Ways to Invest in Micro nance 289
Micro nance funds 289
Publicly traded micro nance institutions 290
Micro nance bonds 291
Taking Heed of Some Concerns and Considerations
for Micro nance Investors 292
Charging high interest rates and high expenses 292
Adding the burden of debt 293
Offering handouts versus investments 294
Making a pro t (or not) 294
Applying Micro nance Principles to Other
Emerging-Market Investments 295
Part V: The Part of Tens 297
Chapter 20: Ten Up-and-Coming Emerging Markets . . . . . . . . . . . . . .299
Argentina 299
Egypt 300
Ghana 300
Indonesia 300
Jordan 301
Kazakhstan 301
Morocco 301
Nigeria 302
Philippines 302
Vietnam 302
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xxi
Table of Contents
Chapter 21: Ten Tips for Emerging-Market Investors . . . . . . . . . . . . .303

Looking for Listed Securities 303
Building Diversi cation across Markets 304
Finding Diversi cation within Markets 304
Diversifying Currencies 304
Doing Careful Company Research 305
Watching Suppliers and Customers 305
Paying Attention to Debt 306
Monitoring Country News 307
Accepting Volatility 307
Taking a Long-Term View 307
Chapter 22: Ten Traps to Avoid When
Investing in Emerging Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .309
Expecting Outsized Pro ts 309
Disregarding Politics 310
Not Understanding How the Rules of the Game Differ 310
Taking a Flyer without Research 311
Ignoring Closed-End Funds 311
Overlooking Home-Country Investments 312
Getting Swept Up in Currency Headaches 312
Focusing Only on the BRICs 312
Falling Victim to Outright Scams 313
Losing It All to Nationalization 313
Appendix: Resources 315
Books 315
Magazines and Newspapers 316
Blogs, Web Sites, and Other Resources 317
Index 321
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Emerging Markets For Dummies

xxii
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Introduction
W
e live in a big world. Most of the people who share space on this
planet live in countries that are less developed than the United
States or such other big industrialized nations as Australia, Canada, England,
France, and Japan. Instead, they live in Brazil, China, India, Russia, or any of
the other nations that are manufacturing goods, developing new technolo-
gies, exporting oil, and otherwise growing their economies at a faster pace
than can countries with established economies.
The potential growth in emerging markets is exciting, and investors have
many ways to tap into that growth. You can invest in stocks, bonds, mutual
funds, and exchange-traded funds. You can buy real estate or exchange cash.
Or maybe you want to stay with a home-country investment that gets most
of its growth from emerging markets, which is the situation with many of the
world’s major multinational corporations.
Emerging Markets For Dummies tells you what you need to know to make
smart investments in emerging markets. I start out with facts on why and
how investing works in less-developed countries with growing economies. I
tell you how to do research so you can determine whether an investment is
a good one for you, with pointers on where to go for more information than
I can possibly include in this book. I explain the possibilities and pitfalls that
investors face in emerging markets, whose laws and customs may be very
different from the laws that you’re used to. And I lay out the different types
of investments that you can use to put your plan into action. I also include
some information on how to find banks, mutual funds, and other institutions
to help you with your decisions.
This book is designed to get you started in the world of emerging-market

investments. You may want more information on different types of invest-
ments and investment techniques, or you may want to research a particular
investment or market in greater depth than I cover here. That’s fine. I include
plenty of references in the book to help you figure out where to go next.
About This Book
Let me tell you what this book is not: It’s not a textbook, nor is it a guide to
getting rich quick. If you want to know more about the theory and mechanics
of the market, you can find lots of great texts in a college bookstore. If you
want to get rich quick, maybe you need to buy a lottery ticket.
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