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Emerging Markets and the Capital Flow Conundrum

The two-day mega event just got over and it was, without a shadow of a doubt, an incredible experience to present the EMAlpha story at the “INVENT, IIT2020: The Future Is Now”, the annual conference of panIIT USA. The event had an amazing line-up of start-ups and founders who are doing great work, some of the most active VCs amongst the panellists and some very interesting conversations to ponder. It goes without saying that some of the issues and topics discussed will stay with us for a while.

One of the major issues discussed was how the challenges of the twenty first century pertaining to basic necessities like food, health and education for all would be resolved. But more importantly, how to ensure that the gains in technology and innovation reach the bottom of the pyramid in the post-Covid world. Because ultimately, it is money that gets the world going and it is an irrefutable fact that none of this is going to be possible without addressing the challenge of achieving the most optimal ‘capital flow’ across the world.

In a near-zero interest rate environment across most developed markets, the capital needs to find avenues where it can be deployed fruitfully and Emerging Markets(EM) offer a great opportunity for investors from the other part of the globe i.e. the Developed Markets. Most EMs are aware of this and they do not want to miss out on this ‘once-in-a-blue moon’ opportunity. For example, the Indian Prime Minister, Narendra Modi in his opening keynote address for this conference emphasized that his government is fully committed to reforms.

In his speech, Mr. Modi mentioned his government’s track record on reforms in several key sectors like taxation, banking, agriculture, atomic energy… His message was clear: India presents amazing opportunities to global investors and it is for them to benefit from the same. The Indian PM also added that the current pandemic notwithstanding, India has gotten record investment. In a way, it was a speech directed at the decision makers who determine the flow of global investment to look favourably towards India. It was also an attempt to convince them of the progress that the Indian Govt is making to ensure that the environment is more conducive for economic progress and growth.

In most Emerging Markets, there are other issues which crop up once the basics are put in place. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for FDI and FPI in EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants agree and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like,

  1. Real time news collection from multiple languages,
  2. Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are also challenges like ensuring that companies behave responsibly, and they adopt sustainable business practices. Also, there is a need that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behavior of companies. Case in point, the ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well, like which data to use and there is also no standard framework for evaluation.

Some of these problems are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. For example, EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across Emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more developed markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please send us an email at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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