Brian Mairs
CFA Institute - Europe, Middle East, Africa
+44 (20) 7712-6511
brian.mairs@cfainstitute.org
Kathy Valentine
CFA Institute - North America
434-951-5348
kathy.valentine@cfainstitute.org
Investors In ‘BRIC’ Economies United In Concerns About Corporate Governance And Ethical Standards
Investor attitudes survey reveals differences in outlook for Brazil, Russia, India, and China, and little fear of political instability in China
View country-specific survey results: Brazil, Russia, India, China
London, U.K., January 20, 2006 — Investors in four of the world’s most rapidly emerging economies — Brazil, Russia, India and China — are tempering their optimism for future growth in their markets with concern about domestic political risks, ethical standards and corporate governance in local businesses, according to a survey of investment professionals published today.
More than 1,100 CFA Institute members and candidates participated in the investor attitude survey of the BRIC countries, giving a unique overview of market professionals’ concerns in these emerging economies. The respondents are studying to achieve, or have already earned, the prestigious Chartered Financial Analyst® (CFA®) designation. The CFA Programme sets a globally recognised standard for measuring the competence and integrity of financial analysts, portfolio managers and investment advisers.
The survey results show a united concern for the state of ethical standards in business and a particular need for improvement in corporate governance standards, but also reveal vastly different investing cultures.
“The global financial market attaches a risk premium to securities in emerging economies, precisely because of factors such as political instability and the lack of an ethical track record,” said John Barrass, Head of the EMEA office of CFA Institute. “What is intriguing is that investors remain confident about their countries’ investment potential. The real opportunities are in the services sectors — particularly financial services. It is also a wake-up call to the growing number of corporations in China — that investors view the greatest danger to their investments to come from poorly-governed businesses.”
CFA Institute conducted the survey using an online questionnaire. The overall response rate was 22 per cent. More than 90 per cent of the respondents were citizens of the country in which they responded. In all, 1,184 CFA Institute members and candidates from Brazil, Russia, India and China participated in the survey during November-December 2005 (78 in Brazil, 181 in Russia, 323 in India and 602 in China).
Investor optimism strongest in India
Indian investors were the most optimistic about their
investment market: 55 per cent of respondents were “highly optimistic”
and 39 per cent “somewhat optimistic” (one respondent justified his
optimism by adding: “Steady rise in level of disclosures, excellent
economist as PM of the country, confidence of company CEOs …”). In China,
16 per cent were “highly optimistic” and 53 per cent “somewhat
optimistic.” (One Chinese respondent wrote: “Continuous government
efforts have been made, however investors’ trust and confidence still not
in place, and short term strategy prevails among fund managers.”) In
Brazil, 15 per cent were “highly optimistic” and 62 per cent “somewhat
optimistic.” In Russia, 17 per cent expressed pessimism about their
investment market, although 11 per cent were “highly optimistic” and 53
per cent “somewhat optimistic.” A Russian respondent wrote: “My feeling
is that the economy is stabilising in Russia. The wealth of people grows
and there is less need for black market schemes.”
Financial services, energy and consumer goods
promise highest growth over next three years
In all four countries, investors placed financial services
among the top three sectors for growth; Brazil, Russia and China also
agreed that the energy and consumer goods sectors hold great potential.
The top three investment opportunities cited by respondents were:
Brazil: oil and gas, energy and utilities (50 per cent); banking, finance and insurance (49 per cent); and consumer goods and services and retailing (40 per cent).
Russia: consumer goods and services and retailing (58 per cent); oil and gas, energy and utilities (53 per cent); and banking, finance and insurance (49 per cent).
India: banking, finance and insurance (55 per cent); construction (36 per cent); and communications, technology and telecoms (35 per cent).
China: banking, finance and insurance (61 per cent); consumer goods and services and retailing (37 per cent); and oil and gas, energy and utilities (33 per cent).
Political risks and local economic issues top list
of investor concerns
Investors based in China are the least worried about
political instability, the survey shows, but in all four BRIC countries,
political instability is followed by concerns about local economic
issues.
Brazil: political risk (52 per cent); local economic risk (43 per cent). One respondent wrote: “The greatest risk in Brazil for the coming years is the ascension of an opportunistic politician that could sacrifice the economic stability to promote short term growth.”
Russia: political risk (74 per cent); local economic risk (13 per cent). Many respondents were already anticipating the 2008 presidential election and considering the possible effects of the result on the economy.
India: political risk (66 per cent); local economic risk (24 per cent). One respondent wrote: “The government’s support for the reform process will be key to ensuring that we become a mature financial market. At this point my best guess is that the authorities will continue to be committed to the reformation of India.”
China: political risk (37 per cent); local economic risk (15 per cent).
Corporate governance standards in resident listed
companies
Only in India do any investors consider corporate governance
standards among resident listed companies to be “excellent” (four per
cent). Chinese and Russian investors are severely critical of standards
among their companies.
Brazil: corporate governance standards in resident listed companies are “good” (24 per cent); “fair” (46 per cent); and “poor” (27 per cent). However, reforms are needed in the treatment of minority shareholders and financial disclosure standards. One respondent wrote: “The corporate governance of public companies is good to excellent. The problem lies on the other great majority of companies which are not public yet.”
Russia: standards are “good” (eight per cent); “fair” (41 per cent); and “poor” (49 per cent). Reforms are needed in disclosure and transparency standards, say 42 per cent of respondents.
India: standards are “good” or “excellent” (46 per cent); “fair” (42 per cent); and, “poor” (11 per cent). Forty-seven per cent of respondents believe that disclosure and transparency standards are in need of reform. (One respondent wrote: “Boards are dominated by family members or government nominees and need to be broad-based with professionals. Many have too many directorships. Awareness of corporate ethics is low.”)
China: standards are “good” (three per cent); “fair” (28 per cent); and, “poor” (68 per cent). Most in need of reform is the internal structure of the company (20 per cent of respondents).
Companies generally “unconcerned” with ethics,
particularly in Russia; top regulatory priority is addressing “use of
inside information”
Many investors feel that companies in the emerging economies
are generally “unconcerned” with ethics, particularly those in Russia
(Brazil 33 per cent; Russia 60 per cent; India 31 per cent; and, China 39
per cent).
In Brazil and India, the majority of investors do believe the ethical climate is “generally favourable,” but many in Russia and China believe theirs need “significant change.” A Russian wrote that what was needed was: “… the establishment of a value-oriented investment philosophy. Russians still do a lot of business with unethical power plays behind the scenes.”
In Brazil, 51 per cent of respondents believe there is a “favourable” ethical climate (while 15 per cent believe the climate is “unethical”). One observed: “The independence of sell side analysts regarding IPOs is probably the area that needs more improvement.” Thirty per cent say the “highest priority for change” is the use of inside information.
In Russia, 29 per cent of respondents believe the climate is “generally unethical” (11 per cent believe it is “somewhat ethical”). The priority for change is an end to insider trading (39 per cent).
In India, 62 per cent of respondents believe there is a “favourable” ethical climate (while five per cent believe it is “unfavourable”). Twenty-seven per cent say the “highest priority for ethical change” is the use of inside information.
In China, 28 per cent of respondents believe the business climate is somewhat unethical. Fifteen per cent say it is highly unethical. Only 18 per cent believe there is a favourable ethical climate. The areas most in need of improvement are “general ethical behaviour” and “responsibility to clients” (17 per cent for each).
CFA Institute
CFA Institute is the global, non-profit professional
association that administers the Chartered Financial Analyst®
(CFA®) curriculum and examination program worldwide, publishes
research, conducts professional-development programs, and sets voluntary,
ethics-based professional and performance-reporting standards for the
investment industry. CFA Institute has more than 79,000 members in 125
countries and territories, including the world’s 67,000 CFA
charterholders, as well as 131 affiliated professional societies in 52
countries and territories. CFA Institute is headquartered in
Charlottesville, Va., USA, with regional headquarters in London, Hong
Kong, and New York. More information may be found at www.cfainstitute.org. (Bloomberg users can find
CFA Institute at 497458Z).
Note to Editors
CFA Institute offers educational seminars for journalists on
financial statement analysis, accounting red flags, and portfolio
management topics. Two audio Webcasts are scheduled between March and May
2006. To express your interest in any seminar, e-mail publicawareness@cfainstitute.org.
The next Webcast will be on:
Tuesday, March 21, 2006
Topic: Seven Habits of Successful Investors
Duration: 12:00 pm to 1:00 pm (Eastern)
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Ian Bremmer, President, Eurasia Group
Alan J. Brown, Head of Investment, Schroders Investment Management
Limited
Abby Joseph Cohen, CFA, Chief U.S. Investment Strategist, Goldman, Sachs
& Co.
Mark Faber, Managing Director, Marc Faber Limited, and Editor, "The
Gloom, Boom & Doom Report"
Sir David Tweedie, FSIP, Chair, International Accounting Standards Board
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