Abstract
The purpose of this dissertation is to study the opportunities and challenges that emerging markets present for major financial players, namely corporate and investment banks. Indeed, they play a specific major role in the global financial system compared to retail banks by offering investment services through direct financing. In particular, they engage in the most dynamic asset classes in the most dynamic regions of the world, especially emerging markets, which are at the heart of our concerns.
The first part of this work consists of a review of the literature to clearly define the concept of emerging markets, as well as the different roles and functions of investment banks, before analysing the current state of corporate and investment banks in this market category and setting out our theoretical framework.
Then, in the second part, we identify the specific characteristics of emerging markets for CFOs, who must take into account the regulatory framework specific to these countries compared to developed countries, in terms of financial transparency, reporting standards, and investor protections, as well as specific compliance factors in terms of anti-corruption legislation, barriers to entry into their market, and regulatory requirements. Once this framework has been specified, we study the opportunities offered by emerging markets for investment and finance banks, as well as the challenges they face in terms of regulation, economic volatility, political instability, and cultural, social and technological instability.
The third part deals with an empirical analysis of the strategies implemented by corporate and investment banks in emerging countries. We examine different categories of financial assets in a panel of 14 emerging countries (Argentina, Brazil, China, Egypt, Ethiopia, India, Indonesia, Malaysia, Mexico, Nigeria, South Africa, Taiwan, Thailand and Vietnam), sought by the BFI, namely equities, corporate and government bonds, and commodities, also taking into account the country's risks, the business climate and the macroeconomic situation of these countries.
Finally, we make the following recommendation in terms of investment by CIBs in emerging countries, namely: a strategy of portfolio diversification and asset allocation, evenly distributed between equities, corporate and government bonds and commodities in these emerging markets. Such an approach is also appropriate at the moment, insofar as emerging countries are affected by country risk, as well as by macroeconomic shocks, such as the current trade war being waged by the Trump administration against emerging markets, which will damage their macroeconomic prospects in the coming months.
Extract
[...] In contrast to developed countries, capital outflows by residents are particularly damaging for emerging countries because they have to pay a high risk premium when they borrow in their own currency. This premium represents a significant financial burden, particularly for heavily indebted countries. In the event of an economic slowdown, it can exacerbate debt servicing and lead to a debt overhang. Cohen and Portes (200372) distinguish between two types of crisis for emerging countries: a crisis of confidence, caused by factors such as political risk, a flight to quality or a contagion effect, and a crisis based on economic fundamentals. [...]
[...] In this climate of euphoria, banks proved particularly vulnerable to moral hazard, financing projects with low returns. This phenomenon was particularly evident in Latin America before the 1994-1995 crisis, where rapid growth in bank lending was mainly caused by the massive influx of foreign private capital, often intermediated by local banks (Sachs, Tornell and Velasco, 199662). Subsequently, during the Asian crisis of 1997-98, South-East Asian countries experienced high volatility in foreign portfolio investment, which preceded the collapse of many banks (Kaufman, 200163; Kaminsky, 200364). [...]
[...] The current trade war is leading to increased uncertainty, weakening emerging market currencies and inflationary pressures. It is also having a knock-on effect on global supply chains, affecting the automotive, semiconductor and pharmaceutical sectors. - Strategic recommendations for investment banks in emerging markets We recommend the following eight measures: Focus on balanced portfolio diversification, which means that investment banks should include equities, sovereign and corporate bonds, and commodity-linked products in their portfolios. This helps smooth performance and better absorb exogenous shocks. [...]
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