Risk analysis framework for investors in emerging markets: a South African perspective

Abstract

Brazil, Russia, India, China and South Africa (BRICS) have had divergent fortunes in the past decade (2009–2019), with Brazil and Russia, both large oil producers, plunging into recession, the Chinese economy slowing down, and the South African economy getting weaker, while the Indian economy shows momentum. Despite all this, emerging markets showed remarkable resilience during and after the global financial and economic crisis of 2008–2009. Their resilience is remarkable considering that they managed the global crisis and the subsequent Eurozone sovereign debt crisis better than expected. Emerging markets were not entirely immune from the effects of the global crisis, as evident in the dwindle of their exports and growth in the fourth quarter of 2008 and the first quarter of 2009. Therefore, whilst investors may invest in emerging markets, the realities of investing in emerging markets are sometimes far from the perceived truth as there are risk exposures. A sound investment is crucial for investors as it endeavours to provide a level of comfort especially when investing in emerging markets. Therefore, risk management can be applied as tool to ensure that a sound investment is made. Risk management frameworks are somewhat new management concepts in emerging markets but are very important disciplines for investors who are keen on investing in these markets. The aim of this study was to develop a risk analysis framework for investors in emerging markets, using South Africa as a gateway to BRICS countries. A risk analysis framework provides a structured approach to investing, and could be used by investors when considering investments in emerging markets. The study provided insight into emerging market risks, risk exposures, economic data and outlook from a BRICS perspective. BRICS countries are regarded as the most advanced emerging markets, with huge growth potential, which should have a very sound financial system in place to mitigate any form of risk exposures that could be detrimental to investment objectives. Should a sound financial system and risk analysis framework be lacking and or not adequately developed and implemented, the afore-mentioned potential could be nullified and could negatively affect the economic growth and well-being of any emerging market. The literature of the study was conducted in 2017 and 2018; thus, the effects of the Covid-19 pandemic are not included in the findings. However, this might be a topic for further research, using this study as a platform.