The more corrupt a country is the better the returns its equity markets offer, new data indicate

Corruption: doing the dirt

But look at the numbers. Since 2000, the 14 big stock markets for countries with “poor” governance, as ranked by Transparency, have enjoyed an average annual return of 11 per cent. Other markets ranged between 5 and 8 per cent. This suggests that corruption is a risk factor, and just as investors get a risk premium for investing in small or cheap companies, maybe they also get one for corrupt countries.

In the 1990s, academics discovered that companies with poor governance traded at a discount. A decade later, after big investors such as Calpers forced reforms through, the discount was gone. Is something similar happening in emerging markets?

It might, but remember that investors can shake up a company because they own it. It is far harder for them to force change in a country. Investors must trust in support from voters, activists and politicians.

The mania for “Brics” investing has now run its course. Those who would hope to harvest the corruption premium over the next 15 years must be sure to buy at deep discounts.

Source: www.ft.com