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Pandemic, an opportunity for longterm investment in emerging markets?

Depressed assets, investment incentives for manufacturers, and desire to diversify production away from China create opportunities for both manufacturers and emerging markets. Competition among emerging markets will not be based on labour force or incentives. Strengthening the rule of law is how countries can differentiate themselves and seize the opportunities presented.


The pandemic has taken and is continuing to take its toll on the real economy. The disconnect between the real economy and the financial markets is still there and many portfolio investors are focused on the short-term opportunities presented by the unprecedent liquidity pumped into the markets by governments. While these opportunities are real, one must not overlook the long-term opportunities, which are less obvious and trickier to catch.

Businesses and investors learned several lessons from the pandemic. While most businesses knew that they need to diversify their customer markets, few focused on diversifying their manufacturing. In fact, the opposite happened. Over the past decades, as China minimized the reflection of cost of externalities on the production facilities, many companies shifted their production to China. This pushed a lot of former manufacturing countries, that became unable to compete with China, to look for employment generation opportunities elsewhere, such as service and tourism.

However, now with most businesses realizing that they need to diversify their production to mitigate city, country, or even region-specific risks, new acquisition and factory investment in other a diversified group of locations is becoming a necessity. This necessity turns into an opportunity for both businesses and emerging markets as most emerging markets present depressed asset prices, government incentives and local skilled and cheap labor force, both white and blue collar.

With the assumption that at some point in time, economic activity will pick up and demand for manufactured goods will increase, this is the time for global businesses to make new partners. At the same time, the opportunity can be realized by emerging market economies if they go beyond providing financial incentives and use this period to strengthen their legal frameworks to provide the security that international investors demand for such long-term engagements in their countries. That's where countries can differentiate themselves in a world where governments are going to wrong way by becoming more authoritarian. No amount of incentive package can make up for lost trust in the judiciary.

Related reading:

Pandemic Is an Opportunity for Developing Nations - Bloomberg

Diversification from China: The push and pull factors - Nomura Connects

Pandemic quickens diversification of supply chains beyond China - Maplecroft

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