All eyes on emerging and frontier markets


Low interest rates and distorted equity prices in developed markets are forcing institutional investors to re-think their portfolio exposures. As a result, some investors are starting to seek out alpha opportunities in emerging and frontier markets.

Societe Generale Securities Services (SGSS) participated in a number of expo panel sessions at the Virtual Network Forum’s Autumn Meeting in late 2020, exploring in depth how global investors can best navigate these emerging and frontier economies. 

CEMAC: Finding a new frontier

The CEMAC (Central African Economic and Monetary Community) markets, comprising of Cameroon, the Central African Republic, Chad, Gabon, Equatorial Guinea and the Republic of Congo – are facing a trio of existential challenges, principally COVID-19, ongoing security issues and the fallout from deteriorating oil prices, all of which are having an adverse impact on public finances, explained Louis Banga-Ntolo, Managing Director, SG Capital Securities, Central Africa at Societe Generale. Despite this, CEMAC markets are looking to diversify their economies with a number of countries in the region having committed to privatising some of their state-owned industries. Banga-Ntolo added 10 companies are poised to list over the next two years on the BVMAC, CEMAC’s regional stock exchange, in what will increase its overall market capitalisation from €0.52 billion to €1.52 billion.

Be mindful of the risks

From an investment viewpoint, CEMAC does pose risks. While welcoming the various privatisation initiatives across CEMAC and the additional liquidity benefits this will bring, Godfrey Mwanza, Head of Africa Franchise, Absa Asset Management, highlighted it was essential that governance was taken very seriously at these newly listed companies.

Privatisations are interesting from a governance perspective because there is always a lingering public sector interest in them. As a shareholder and a board member, we would want to know if the government will be beneficial or detrimental to the company. Governance is also very important from a regulatory perspective too. If a company does not publish its results, they should be fined but this does not always happen in Africa, said Mwanza.

Although CEMAC has an exciting pipeline of IPOs (Initial Public Offerings), network managers said they would not be rushed into opening up accounts in the region and will follow the necessary risk management steps.

It is important in markets such as CEMAC that we appoint the right provider. Given the IPO timetable, this is crucial. We would also want to ensure that our cash and securities are in the same place and that the local provider has access to a deep pool of liquidity in the local currency to get our application in, commented Craig Hind, Head of Network Management, Absa Limited.

Hind added that ongoing COVID-19 travel restrictions would also make it difficult for network teams to visit these markets. Without being able to physically meet custodians, market infrastructures and regulators in the CEMAC region, the due diligence process is likely to be a more protracted exercise.

From Russia with Tax

Revisions to Russia’s Double Tax Treaty (DTT) code are expected to have a significant impact on foreign investors in the market.  In 2020, the Russian Ministry of Finance informed its opposite numbers in Cyprus and Malta that tax on interest and dividends at source would rise to 15%, potentially already from 2021. Vladimir Vinogradov, Head of Tax at Rosbank, said this was a substantial increase, with dividends having previously been taxed not infrequently at 5% and interest being exempted from any levies. Russian tax officials are likely to renegotiate DTTs with other markets beyond Cyprus and Malta including the UK, Austria, Ireland, Luxembourg, The Netherlands, Hungary, Singapore and Hong Kong. However, Vinogradov said it appeared that some jurisdictions – principally France, Germany, Italy and China – would probably not have their Russian DTTs amended.

Based on how the treaties with Cyprus and Malta are changing, the reduced tax rates may remain available only to quite a limited number of investors, such as public companies, insurance companies, pension funds, Governments and Central Banks, said Maria Egorova, Associate Partner, Global Financial Services, Tax & Legal Department, EY.

Anatoly Matyukhin, Deputy Head, SGSS Russia, said the bank was working hard to support the interests of clients in respect to the DTT amendments. Matyukhin said SGSS – as a sub-custodian and local tax agent in Russia – was advocating the government on the reforms to ensure they are transparent and not disadvantageous to foreign investors. He added the bank was also communicating regularly with clients and providing them with information on the rule-changes.

Reforms in India spark investor interest

Historically, India has been a very difficult market for investors to penetrate owing to its regulatory complexity. Beginning in the 1990s, the market has undergone a period of liberalisation, and recently made major changes to its FPI (foreign portfolio investor) approval process.  

The removal of broad-based criteria and recategorisation of FPIs as either Category 1 or 2 on a risk based approach has made it easier for new investors to obtain a license’’ said Abraham George, Head of Sales and Business Development, SBI-SG. 

He added that the recently introduced Common Application Form (CAF) has consolidated multiple requirements for FPI registration and made it more seamless and faster for obtaining the FPI license.

Nehal Vora, CEO at CDSL, said the new expedited, centralised and digitalised KYC structure would make it easier for investors to trade local securities. As a result of these changes, FPIs can now appoint a second broker without having to repeat the entire KYC process.

The establishment of GIFT (Gujarat International Finance Tec) City is also likely to fuel foreign investor interest in the Indian market. GIFT City is a recently established international financial services centre (IFSC), which the Indian authorities hope will eventually compete with major regional hubs such as Singapore and Hong Kong. Vora said GIFT City would provide a number of strategic benefits for foreign institutions. Firstly, all of the trading and settlement that takes place in GIFT City is carried out in USD thereby negating any currency risk. In addition to supporting trading in a wider range of financial investment products, Vora said the regulatory regime in GIFT City was liberal, before adding that businesses looking to set up in in the IFSC would enjoy a reduced tax regime for a reasonably long period of time.

Although the Indian market has made a number of positive in-roads, it does face some challenges. Earlier in the year, SEBI announced it was looking to transition away from a T+2 settlement cycle towards T+1, a proposal which elicited widespread opposition from FPIs. While T+1 may be an enticing prospect for domestic investors, it would force FPIs to pre-fund their trades leading to increased settlement risk, acknowledged Stewart Gladstone, Head Of Segment & Solutions, Financial Intermediaries & Banks at SGSS. Nonetheless, Vora believed regulators will not make T+1 compulsory for all investors, but would permit FPIs to continue settling on T+2 if they prefer to.

A new dawn for Emerging markets

With investors struggling to obtain decent returns from developed markets, they are increasingly pinning their hopes on emerging and frontier economies. Although these emerging/frontier markets offer a number of exciting and dynamic opportunities for investors, it is not a risk-free endeavour. It is vital that investors engage with leading providers when building up exposures to these regions