A big bet on emerging markets risks leaving nowhere to turn

 
Marc Sidwell
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EMERGING markets are a tricky beast. Michael Page has hardly been following a controversial strategy in pursuing their promise. It has, on paper, invested to expand its global recruitment business where long-term growth potential was generally agreed to look the best – and given the economic situation in the UK, that could still seem a prudent decision.

Page now generates 78 per cent of its gross profit outside the UK. Its eyes are set on rising further alongside the hopes of previously untapped markets. Yet its problems are not just local, but global: pre-tax profit was down 37.9 per cent in the first half of the year overall when compared to the same period of 2011. Even after adjusting for exceptional items, pre-tax profit was down 20.6 per cent.

The trouble is, when you make a play on a huge macro trend like EM expansion, you can look like you are diversifying your business – so many offices in different countries – yet in practice, that network is not just costly to establish but its fortunes risk being highly correlated in an extreme scenario. Such as being sideswiped by a global economic downturn.

There are also other practical downsides that spoil the grand EM narrative – adverse exchange rates turned small increases in revenue and gross profit into flat or slightly negative numbers for the recruiter.

Page is playing a long game, and if the fundamentals of emerging markets look less good than they did, they retain promise. Yet it’s proving a costly short-term strategy.