Emerging markets no longer offer a quick buck

What a shock to the system to leave the sun-drenched streets of Harare, with their daytime temperature of 28C, for the wind and rain- swept streets of London. Chillier temperature-wise, that is. Not so far as markets are concerned.

It is remarkable that in a few short days share prices have once again entered virgin territory. London is still building on 1996's useful performance - a rise made more significant by the impressive strength of sterling. The Zimbabwean stock market has not performed too badly, either.

The financial pages of last Tuesday's Herald - Harare's leading newspaper - pointed to foreign investment of nearly Zim$4bn since June 1993 when the government opened up the market to foreign investment. Do not get too excited. There are nearly Zim$18 to the pound, so we are talking about no more than around pounds 250m.

The Zimbabwe stock exchange is the second-largest in Africa after South Africa. During 1996 it recorded a rise of 121 per cent, making it the fourth-best performing market after Hungary, Russia and Venezuela.

When I was there share prices were experiencing a modest retrenchment, although optimism seemed high following some of the heaviest rains seen in recent years. A good rainfall is important for this largely agricultural economy - just as well, as the manufacturing sector grew only 2.3 per cent in real terms last year.

It put me in mind of the fact that emerging markets remain an exciting prospecting ground. Africa is not necessarily the best starting point, though.

While rich in natural resources, it lacks the dynamism of, say, the Far East. Political instability, famine and conflict all combine to deliver an uncertain outlook, while corruption is a continuing worry for international investment managers.

The reality is that it is becoming more and more difficult to find bargains in emerging markets. The guarantee of a swift profit no longer exists. Investing bankers have been putting more and more resources into this field, so competition to find the best investment has intensified massively, driving up prices and diminishing returns.

Much of the focus of attention presently has been in the old Communist bloc countries. The amount of direct investment by foreign institutions has been rocketing, with much of the money coming from western Europe and, in particular, Germany.

In 1995, for example, the last year for which definitive statistics are available, the amount of money invested into Poland from abroad rose by 107 per cent over the previous year, making it the second-largest recipient of foreign investment after Hungary. Of course, we are not just talking about stock market investment.

Still, it goes to show that there is now enough money washing around these newly capitalised countries to make investors more cautious.

One of the earliest players in the emerging markets game was Templeton, where the dome-headed Dr Mark Mobius swiftly gained a reputation as a guru in the business of investing where no conventional investor had ventured before.

At one stage the Templeton Emerging Markets Investment Trust stood at an 18 per cent premium over net asset value - surely a record for a conventional trust.

As the bars of Ulan Bator and Sao Paulo have become crowded with alert, eager, lightweight-suited MBAs seeking to set up joint ventures, buy assets, or simply grab a piece of the action, so it has become difficult to stick to the very tight criteria the good doctor adopted, which limited his risk.

Templeton remains an important and respected manager of emerging markets' assets, but the choice to the investor is now much wider with many highly regarded names offering funds.

It is not a one-way street, as any Albanian will tell you, but the abandonment of controlled economies and the liberalisation of trade and capital markets is throwing up opportunities not seen since the Industrial Revolution and the massive expansion of European commerce into Africa and the Far East last century.

Anyone with a bit of money to burn need look no further than a soundly managed emerging markets trust with a record - though few will have one that goes back further than Templeton's.

Brian Tora is chairman of the investment strategy committee at Greig Middleton.