Dialling down the excitement


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

Investors – whether private, institutional or corporate – have a tendency to get very excited about the potential of the world’s emerging markets and that is precisely why the occasional cautionary tale about the associated risks never does any harm.

This is just such a tale. mobile phone giant Vodafone is one of the largest foreign investors in india, boasting the third biggest base of mobile phone subscribers at almost 150million sims. The company has invested billions of pounds in the country by expanding its mobile-phone network infrastructure – towers, base stations etc. - and purchasing mobile spectrum from the Indian government.

However no matter how robust Vodafone’s Indian business plan, it almost certainly didn’t foresee the potential consequences of a proposed legislative amendment that, if enacted, will not only see a change in the way corporate transactions are taxed but, because it is currently intended to be retrospective over the last 50 years, could also affect completed deals dating back to the early 1960s.

Whether this proposal ultimately bears much resemblance to what finally passes into law after lobbying from multi-national companies and debate within the Indian parliament remains to be seen, but the story does serve to illustrate that emerging markets are called that for a reason. they are emerging economies with emerging legal, political and financial systems and institutions.

In theory, perhaps, India should be a market that offers few problems in this regard. however, even though the country’s judicial system actually found in favour of Vodafone at an earlier stage, the government appears ready to ignore that decision and press ahead with its proposals – something one would at least like to think would be less likely happen in the US and Western Europe where tax laws don’t tend to be backward looking.

So while emerging markets offer some fabulous growth opportunities – in Vodafone’s case, mobile phone penetration in India is not only growing fast but is also fundamental to the country’s long term economic development as it lacks fixed line telecoms infrastructure – they also present risks that many investors only start considering seriously when these sorts of adverse events occur.

As value investors we believe risks should be compensated for by valuation and this applies as much to emerging markets as to any other. we would encourage investors to think carefully about whether they are focusing too much on the potential rewards from their investments whilst ignoring many of the risks that go hand-in-hand with investing in the developing world.


Andrew Lyddon

Andrew Lyddon

Fund Manager, Equity Value

I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.

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