According to John-Paul Smith, the founder of the research firm Ecstrat Ltd., developing nations are unlikely to yield promising investment opportunities. Smith's pessimism specifically pinpoints "authoritarian regimes" in China and Russia, while also encompassing Thailand, Turkey, and the Philippines.
Notably, Smith's negative forecasting seems to contradict recent events, where bond traders have actually reaped greater financial rewards from autocracies than democracies. But Smith's point is more nuanced than that. He allows that this correlation may hold for the early stages of an autocratic regime, but the benefits are not long-lasting. Smith believes that authoritarianism inevitably results in productivity downturns, and debt and equity assets will decline accordingly.
According to Smith, the idea that "both sovereign and corporate governance" worldwide will "converge" into a liberal norm is a void expectation. Smith says that stocks suffer under authoritarianism because states tend to redistribute resources away from minority capital or non-controlling interests in order to suit the nation's sociopolitical agenda. However, this outlook is not necessarily reflected in the bets that certain funds have placed based on an optimistic view of emerging markets. Even more dangerous for these funds is the fact that such bets have been many years in the making.
Granted, Smith's consultancy is willing to slant towards optimism in the case of Thailand and the Philippines in the short term, owing to their lower exposure to commodity prices, moral hazards, and "contagion risks with China."
Other analysts consider emerging markets to be a better bet. Terra Nova Capital Advisors Ltd. believes that the ongoing rally in emerging markets could last at least two more years as shrinking debt levels support sustainable growth. They cite the Morgan Stanley Capital International (NYSE: MSCI) Emerging Markets Index, which has climbed twice as fast as the MSCI World Index to reach its highest level since 2011, as further evidence in support of optimism.