THE INVESTMENT COLUMN : Demography points to Third World

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The Independent Online
Mexico's botched devaluation last December burst the bubble in emerging markets, one of the most fashionable investment areas of last year. Local stock exchanges from Argentina to Malaysia fell out of bed after the Mexican government's move to cut the value of the peso.

Six months later and with the Mexican stabilisation package announced in March commanding confidence in world markets, many are arguing that now is the time to get back into emerging markets. There are certainly compelling long-term reasons why all investors should be considering such investments as part of their portfolios.

Sheer demography is the most arresting. As the richer populations of the world get increasingly older, it is growing more and more difficult to finance their needs in old age from the resources created by their children. Figures published by the fund manager Foreign & Colonial Emerging Markets forecast that the numbers of workers available in the UK to support dependents, whether created by youth or old age, will drop from 1.9 in 1989 to 1.6 in 2025. In the Third World the picture is reversed, with the dependency figure for Brazil rising from 1.5 to 2.7 over the same period.

Already the amount spent on pensions and health care in the OECD nations has more than doubled to over 22 per cent of gross domestic product in the 30 years to 1990 and the rate of increase is accelerating. Solving the problem through higher taxation is politically unacceptable and increasing productivity hard given that the main Western nations have found it difficult to outperform a long-term growth rate of only 2.5 per cent.

According to Arnab Banerji, F&C's chief investment officer, well over half that increase in GDP is needed to cope effectively with the increased demands of pensioners. As a result, pension providers are being driven inexorably towards investment in emerging markets, he suggests.

Not only will dependency ratios become more favourable, but growth rates in these markets are also likely to accelerate from their already high levels as the Third World moves up the curve of industrialisation, productivity and technology transfer.

This imperative to invest, and improving fundamentals, has coincided with a period when nearly the whole industrialising world has embraced market economics. From defaulting on its debt in the early 1980s, Latin America now has four countries - Argentina, Chile, Colombia and Peru - whose economic performance exceeds the Maastricht compliance criteria, beating countries like Switzerland and Germany.

As ever, timing is all, and the political and economic risks of investing in these markets remain high. As our table suggests, returns can take a long time in coming, but, if Mr Banerji is to believed, sooner or later anyone contemplating retirement will have to tuck some of their money away in the developing world.

Gaps in the

Nynex equation

The proposed merger of Telewest and SBC CableComms could not have come at a better time for Nynex CableComms. Evidence that the UK's nascent cable industry is taking steps to become a commercially viable, consolidated sector gave a last-minute fillip to the flotation price, which at 137p, valuing Nynex at pounds 1.3bn, was higher than expected.

Despite the favourable background to the pricing, the market greeted the shares - in their "when issued" form until next Wednesday - with little enthusiasm. A stabilisation period prevented a fall, but even so the shares only managed to add 0.5p on the day.

Nynex's problem is one facing the whole industry - the difficulty in putting a value on a business that is several years away from making profits. Even a best-case projection does not envisage a positive return before 1999, so the only way to value the company is by discounting projected cash flows back to a current worth. The trouble with that approach is that it depends on numerous variables in which even small adjustments can drastically alter the end-result.

The most important of these is the penetration the company can achieve in its franchise areas. In the past three years the number of people taking up the offer of a cable service has stuck at about a fifth of those "passed" by the cable supplier. That compares with much higher take-up in other countries, and given the high fixed costs of setting up a cable network, is potentially extremely damaging to long-term profits forecasts.

Problems with valuation apart, Nynex has marked advantages over its peers, one of the most important of which is the contiguous nature of its 16 franchises. That gives Nynex a crucial edge, especially in telecoms provision, which arguably is more important to the cable companies than the television service they are known for. Nynex is also putting in a high-quality network, which should allow it to take full advantage of technological advances.

Nynex is probably one of the better cable bets, and offers exposure to a potentially exciting growth area. But a probable return on investment of only 11 per cent is a pretty poor reward for quite sizeable operational and political risks.

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