Why Some Pre-Emerging Markets Will Be Emerging Forever
by Karim Rahemtulla, Contributing Editor
Tuesday, February 15, 2011: Issue #1450
When you visit a foreign country, what takeaways do you have when you leave?
Architecture? History? Culture? The people?
For me, it’s all of those, but on my recent travels throughout a few of Asia’s up-and-coming markets, I came away with three other common themes.
They’re all issues that I’ve spotted before, but were even more pronounced this time around. Why?
Well, not only are these three countries close neighbors, they’re also three of the more prominent and promising “pre-emerging” markets…
- Vietnam
- Thailand
- Cambodia
While all three are beautiful and impressive in their own ways (I’m judging this by visits to major cities and the hubs of commerce in each one), they suffer from three common elements that I consider impediments to growth.
So let’s see what they are – and what each country is doing to address the problems. We start with Vietnam…
Three Barriers Blocking the Growth Path of Pre-Emerging Markets
There are major issues that seem to be part and parcel of life in the countries I just mentioned – and have existed for some time:
- Lack of infrastructure
- Lack of a viable tax system
- Pervasive corruption
What’s more disconcerting, however, is the forced acceptance of these three issues and their interrelation. And if not addressed, all three could squash each country’s potential.
In Vietnam, for example, there’s no doubt that it’s a beautiful country with extremely friendly people. But there’s also a darker side that tends to drag emerging market countries like this down – corruption.
Case in point: One of my companions didn’t have time to get an official visa to enter the country through Saigon. Instead, he’d only received an approval letter that would allow him to get a visa at the airport upon arrival. Sounds straightforward. But airport immigration officials proceeded to harass and intimidate him until he proffered the appropriate bribe to gain entry. It reminded me of the 100 rubles I slipped into my passport when I exited the Soviet Union in 1984, in order to ensure that my lacquer boxes would accompany me out of the country. I’m sure I’d have to pay at least 10 times that amount today. Some things never change.
But there was an even more glaring issue…
The Foundation of Economic Prosperity
Infrastructure.
It’s the foundation upon which any prosperous emerging economy is based. Without it, the path to growth is littered with problems, with a country never able to fulfill whatever potential it may have.
On our way to Halong Bay, for example, a three-hour journey turned into a five-hour odyssey because a truck had flipped over on the road. Halong Bay is a beautiful outcropping of mountains in a bay that leads to the South China Sea and is a very popular tourist destination. Despite that, there’s only one road from Ha Noi to Halong Bay and no sign of any extra lanes being added soon. Our trip occurred in the winter season, so I’m sure the problems are exacerbated during the warmer months
Let’s deal with the second issue – taxes…
No Taxes in Vietnam Means No Infrastructure
There was a time when the taxes paid in the United States didn’t go towards funding deficits but instead funded things like the most comprehensive highway system in the world!
But trying to collect taxes in Vietnam is next to impossible. The population doesn’t seem particularly keen about the concept of voluntary tax remissions and I doubt that the government collects more than a pittance.
Most of it arguably comes from established businesses like hotels who charge a 10% value-added tax, with most business being done in cash at roadside stands and markets.
But of course, as cumbersome as these problems are, hope springs eternal for emerging market investors, as Vietnam’s shortcomings merely provide major opportunities…
Vietnam’s Infrastructure is Ripe for Growth
When you’re looking at potential areas of expansion within Vietnam’s emerging market, infrastructure is front and center. Banking, retail and utilities are all ripe for growth, too.
With regard to the latter, if the country is to grow, it will need to upgrade its electricity system, as usage is currently outstripping supply. In addition, Vietnam has problems with potable water.
Transportation is another area that provides both a dilemma and an opportunity for the future. At the moment, scooters outnumber cars by a factor of 10-to-1, but this is changing as the population gains the means to buy cars. However, unless Vietnam addresses its road infrastructure, the impact will be negated and the “road” to a fully-fledged emerging market will be a long one.
For the foreseeable future, the best way to play Vietnam will be to trade it. In other words, by capitalizing on the volatile, boom-bust nature of emerging markets and the lack of liquidity, which leads to sharp spikes and falls in publicly traded companies.
Contrary to what you might think, this isn’t an entirely bad thing when it comes to the fortunes of investors. If profits are indeed greater in emerging markets, then why not celebrate a market that may be emerging for decades to come.
Next time, I’ll tackle these issues as they pertain to Cambodia’s pre-emerging market.
Good investing,
Karim Rahemtulla
Any investment contains risk. Please see our disclaimer.
8 Responses to “Why Some Pre-Emerging Markets Will Be Emerging Forever”
Comments
By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy.
Check out our selection of daily investment research:
 |
 |
Dubbed a "market maven" by CNBC, Karim Rahemtulla is one of the country's foremost specialists in options trading. As founder and editor of The Smart Cap Alert, he focuses his efforts on all aspects of options trading – LEAPS, put selling/covered calls and spreads. 
You might include Mexico into the corruption area. I don’t go anymore because of it.
Reply
Look closer to home. Deficiencies? Infrastructure? Pervasive corruption? In the USA, broadband is antiquated and restricted. The Blue Star Memorial Highway has more ruts and potholes than the remnants of the Oregon Trail. Rail and air–same. Corruption? Ah, PACs and lobbyists, tax cheats in Treasury and Congress. No names, please. What is the distinction between “counterfeit” and “fiat” currency anyway? Is the Fed the PAC of the Banking Association International? Etcetera, etcetera (King of Siam)
Reply
Very interesting article and good analysis
Reply
More like 20 to 1 of scooters to cars!
We just visited Vietnam, Laos, Cambodia and Thailand last November on vacation. We saw the same thing with the road to Halong Bay. We also saw the exact same thing from Hue to Hoi An, with no signs of any expansion.
I look forward to hearing about Cambodia, because with Angkor Wat, the tourism is definitely taking off, and they have an excellent opportunity to build on it.
Looking forward to hear more, especially since it hits so close to home with our most recent vacation!
Reply
Hi Karim,
Excellent and very accurately written article.
I have lived in Asia for 13 years, mostly in Bangkok, Hong Kong, and the Philippines. Of course with many visits to places like Vietnam, Cambodia etc. Infastructure is a major issue. Thailand is better than most of these countries by a long way. But bribery to get anything done is big Business. My recommendations of investment areas would only be to invest in the currency markets of countries like Singapore, Thailand, Indonesia, Malaysia, against the USD $$$$. KEEP UP THE GOOD WORK.
RGDS, DANIEL.
Reply
Yes, Vietnam and surrounding countries are “early gems”, as they pertain to Asia.
But, last time I checked, there’s a $75 fee to buy stocks on foreign exchanges?
Reply
Is there a currency play in this ? If so, is it recommended ?
Reply
Hi Karim,
Excellent topic it was. Vietnam and other surrounding countries are in a lack of infrastructures. But international investment shall bring them back into the streamline and opportunities for the people.
Reply