Learning from "Six Sizzling Markets" by Pran Tiku

This book essentially examines investment opportunities in BRIC+2 countries. Starting from a historical context, the "8 tenets of change" are examined for each country. The findings are compiled to a list of sectors of potential interest and prominent companies within the sector. This book excels in providing a summary, as well as the approach by Tiku & his team, in making sense of the key emerging markets in the coming decade.


A few insights gleaned so far:

Chapters 1 to 5:

GDP growth may be a strong fundamental of market returns... In the absence of shocks and fads, the GDP growth rate may move in tandem with the evolution of stock prices (adjusted for inflation). This insight was gleaned from Peter Diamond, which I will be interested to read and comment on soon. This can be found in http://economics.mit.edu/files/637

P/E ratio can be used to estimate prices relative to estimated earnings. The higher the ratio, the more likely that the stock is overvalued by the market.

The total market capitalization, as a percentage of GDP, reflects the level of development of the country's capital market.

I was also exposed to the concept of


Demographic Dividend

Clearly most developing countries had passed this window, but arguably emerging markets tend to be located in this window itself.
http://en.wikipedia.org/wiki/Demographic_dividend

Reviewing the mechanism of the ''demographic dividend'': it can be argued that even though the post-dividend period will exhibit a rise in dependency ratio, this does not necessary mean that the economy need not necessarily lead to a decline in standard of living or greater burden on the working population in the next generation.

In fact if there were forward looking policies in place to prepare the working population for retirement, as well as economic policies that enhance the GDP per capita and facilitate high savings ratio among the working population, the burden on the next generation will be significantly lower.

Without the adequate institutional support in place, however, the post-dividend period will be a public policy nightmare; the next generation will need to support more elder dependencies who have longer lifespans than the previous generations but not necessarily better health.

The debilitating effects of  "post-dividend population without institutional support" are starting to be experienced in USA and Singapore, and likely in Canada, Norway, Australia and other countries with aging populations as their social systems fail to undergo the necessary reforms to keep up with the demographic shift.

Equity and Mass Markets

The total GDP of an economy may be large, but it does not imply a sizable mass market exists. This is especially endemic in countries with high inequity and relatively weak middle class.

However the challenge is probably to tease the market data and identify the segment where the "mass market" exists.

For example, a beverage that costs $0.20 per litre produced may not have any customers if it sells at $2 per litre. Lower the price to $1 per litre and a mass market may exist. In light of cost considerations, pricing becomes a factor in gaining the mass market. Pricing is one of the ways to discover untapped markets at the bottom of the pyramid.

Population Density as a key consideration

Businesses that rely on network economies do not merely look at population size before deciding whether to invest in infrastructure to serve the local populace.

Another key consideration will be the population density- the higher the density, the stronger the incentive to invest in local infrastructure to profit from the synergy between a densely populated region and the network being utilized.

These insights are applicable to analysis of large network-dependent sectors such as Telecommunications, Oil & Gas and Freight & Logistics. For these companies, the long-term strategic decisions of market entry and sunk investments may be more influenced by the local population density rather than the overall population size (though the overall size still matters).