Emerging Markets find their feet again

As Emerging Markets continue to rise, an experienced custodian can help global investors access their markets.

August 7, 2024

6 mins

Corporate & investment bankingFinancing & securities services

Emerging markets (EMs) are in demand again as global investors continue to seek out alpha and diversification. While accessing EMs can be challenging, an experienced custodian can help ensure that the process is as seamless as possible.

Investors eye up EMs

After a somewhat flaccid performance in 2023, EMs – especially in Asia – are returning to health, as interest rate hike cycles slowly come to an end and exports recover, fuelled in part by mounting demand for semi-conductors to power the booming artificial intelligence (AI) industry.

“I believe growth in Asia will continue to be resilient. In North Asia, we are seeing GDP growth of somewhere between 2% to 5%, which is pretty healthy if we benchmark it against the US and the EU. In the ASEAN region, GDP growth is hovering between 2%-5%. However, India is registering GDP growth of 7%, which is the highest of all of the Asian economies,” said Ying Ying Tan, Global Head of Product Management, Financing and Securities Services at Standard Chartered, speaking at The Network Forum in Warsaw.

"Growth in Asia will continue to be resilient. In North Asia, and ASEAN we are seeing GDP growth between 2% to 5. However, India is registering GDP growth of 7%, which is the highest of all of the Asian economies."

Ying Ying Tan

Global Head of Product Management, Financing & Securities Services

Despite the promising growth potential, we know some investors are holding back from Asia, because interest rates in the US are still quite high. “As and when interest rates in the US come down, these investors will return to Asia,” said Ying Ying.

While African growth has been primarily fuelled by domestic institutions, we are seeing more foreign investors pile into the Middle East, off the back of strong commodity prices, buoyant IPO activity (particularly in Saudi Arabia, where we have seen 21 IPOs so far in 2024 ), ambitious government growth plans, and positive market reforms.

Obstacles put a blot on EM investing

When accessing and investing into EM economies, investors need to be mindful that some markets are more complex than others.

Certain EMs do seem to be acutely vulnerable to things like volatile geopolitics (e.g. China), sudden regulatory changes (e.g. Nigeria), FX fluctuations (e.g. South Africa), repatriation risk (e.g. Nigeria) and liquidity constraints (e.g. Oman, Bahrain.).

Unlike the EU, which has a shared currency and broadly harmonised regulations across the 27 member states, EMs are incredibly diverse, so investors need to be even more aware and abreast of the regulatory and operational nuances in these markets.  

Account opening processes for EMs – even those within the same geographical cluster – may not always be harmonised.  For instance, the documentation requirements for opening up an account in Oman, are very different from what is needed in Saudi Arabia, creating a documentation burden for investors when accessing the Gulf Cooperation Council (GCC) markets.

The absence of standardisation is a problem facing post-trade too; necessitating different operating models, systems and processes.

“There is very limited harmonisation in Asia.  Take trade settlement processes. Taiwan  requires firms to pre-match their trades, whereas Singapore operates on a single settlement cycle,” said Ying Ying.

T+1 Settlement Cycle – What is the plan for EMs?

T+1 is emerging as a trending topic in Asia.

Not only did India become the first country in the world to roll out T+1, but the Securities and Exchange Board of India (SEBI) is now beginning to phase in an optional T+0 cycle by the end of the year, with an eye towards introducing instant settlements from 2025. 

While China also operates T+0 settlement for A shares, most other EMs in Asia are sticking with T+2 for now.

While the initial transition to T+1 in North America in May has been fairly frictionless (i.e. we have not seen a spike in trade settlement fails and FX markets have remained stable), it is still early days with only a handful of minor logistical issues being reported.

“While India’s transition to T+1 has been going well, issues remain around repatriation. If you settle the trades or cash on T+1, people cannot take their money out of the country until they have received a tax certificate, which usually happens on T+2,” explained Ying Ying. “However, SEBI is currently addressing this issue with local tax consultants and custodians to smoothen the cash repatriation process on T+1,” she added.

"While India’s transition is going well, issues remain. However, SEBI is addressing this issue with local tax consultants and custodians to smoothen the cash repatriation process on T+1."

Although there are no concrete plans to introduce T+1 in the Middle East just yet, we are seeing movement in parts of Africa, with South Africa widely expected to become the first country in the region to adopt T+1.

Nigeria’s ambition to leapfrog from T+3 to T+1 was  blunted by foreign investors , who urged the local regulator and market infrastructures not to rush through the reforms, highlighting it would not give them sufficient time to implement the necessary technology and operational changes.

 As markets begin to plan their moves onto shorter settlement cycles, investors and market infrastructure readiness will play a big part in the successful transition – with international time zone differences, liquidity and funding challenges, technology enhancements and automation amongst the factors that need to be carefully considered pre-transition.

A strong custody partner is needed

As more investors reposition themselves towards EMs, it is vital they select a custodian who can partner with them when navigating the diverse requirements of individual markets.

By having close connectivity with local regulators and market infrastructures, we carry out extensive advocacy work on behalf of our clients, which can lead to meaningful – and often speedy – changes being made in the domestic market. Choosing a provider with a strong local presence is therefore essential.

Equally important is leveraging a provider who has best in class data solutions and technology stacks. The availability of robust data will enable us to move at pace, and develop new products, that will help clients manage risk and support efficiency throughout the custody chain.  However, it is crucial that data is delivered to clients in a way that is flexible, easily digest-able, and in a format that is suited to their needs.

Through technology, custodians can also help clients obtain operational efficiencies when investing into complex EMs.

At Standard Chartered, we are using AI to automate some of the manual processes in EMs, in areas such as exceptions management, data validation, instruction capture and contract lifecycle management, thereby removing some of the operational frictions in these markets.

While EMs can offer investors excellent return opportunities, they do come with their own unique challenges. With our deep local market expertise, we can help clients manage these, allowing them to avoid some of the risks and pitfalls that sometimes come with EM investing.

This article is based on themes discussed during a panel at The Network Forum Annual Meeting 2024.

1. Investment Week – May 13, 2024 – Partner Insight: Remaining optimistic on Emerging Markets
2. Asian Development Blog –May 7, 2024 –  Asia’s semi-conductor powerhouses can thrive in the AI era
3. EY – May 9, 2024 – The MENA region saw 10 IPOs valued at $1.2 billion in Q1 2024