The WFE publishes second report on factors that drive international investor participation in emerging markets

The WFE has published a report - from the investor viewpoint - that seeks to understand what encourages or discourages international investor participation in emerging markets.

The purpose of the research report, written with the support of the European Bank for Reconstruction and Development (EBRD), is to provide exchange operators, securities regulators and policy-makers with greater insight into the factors that drive investment decisions, as reported by investors themselves. Given the contribution that international investors make to emerging and frontier markets such as providing capital to the local economy, participating in risk sharing, and helping to reduce price volatility, a better understanding of investor motivation is a key component of market development and capacity building programmes. This qualitative paper follows on from the WFE’s recent quantitative paper from December 2018 entitled ‘Attracting international investors to emerging markets’.

The key findings of the report are as follows:

• Financial returns are important for investors; however, their broader investment strategy will also guide how they evaluate returns, and how they decide where to invest;
• Frontier (smaller) markets struggle to attract the same levels of attention as their emerging market counterparts;
• Lack of certainty about ownership of shares would prevent investors from investing in a market;
• Corporate governance (or lack thereof) was a particular challenge in emerging market investing, as was government interference, and, in some markets, the length of time it took to open investment accounts;
• Liquidity was a concern, but this was measured in different ways by different investors (e.g. at market level versus at individual stock level). Some investors required a minimum liquidity threshold to invest, whereas others noted they were not overly concerned with liquidity as they adopted a long-term investment strategy;
• The importance of market infrastructure features (including the presence of an electronic trading platform, ability to short-sell, presence of market makers, and the ability to engage in securities lending and borrowing) varied across respondents. Notable exceptions were the existence of a delivery versus payment (DvP) settlement system, and the presence of global custodians; and
• Environmental, social and governance (ESG) factors are important when evaluating investments. In some instances, poor ESG performance would prevent investment while in others, investors said they would engage with companies to look for improvement on relevant metrics.

The report concludes with a number of recommendations that emerging market exchange operators and relevant regulators and policy-makers might action to improve levels of international investors, including:

• Reducing the direct and indirect costs of investment e.g. the time and effort required to open an investment account, and the costs of obtaining information;
• Enhancing the corporate governance of listed firms and educating them about the relevance of ESG factors to their business, and by extension, investors;
• Investing in market infrastructure enhancements to contribute to the improvement of the market over time; and
• Developing the local investor base, including strong, local asset managers.

The WFE's Emerging Market (EM) Working Group includes 28 members whose role it is to develop relevant learning and information-sharing sessions for EM exchanges, and to propose EM-relevant research topics. For today’s report, the WFE interviewed 12 asset owners/managers with combined emerging market equity assets under management (AUM) of nearly USD1 trillion. This research builds on prior work of both the WFE and the EBRD, including the WFE’s most recent EM paper from December 2018. Other WFE EM research includes a report into enhancing retail investor participation in emerging markets and a joint paper with Oliver Wyman focused on enhancing liquidity in emerging markets.

You read the report in full by clicking here.