Beware: ultra-high risk markets ahead

Investors like to be ahead of the pack. That is why many go to great lengths to identify the next exciting emerging markets.

But, when it comes to wind, dividing the world into two categories of markets – established and emerging – can be dangerous. The rush to emerging markets may encourage investors to put money into markets that, in our view, look plain silly.

As investor appetite increases, the best-laid plans can quickly unravel since there is a risk that developers can quickly over-commit both time and capital – and as a result, fall short.

This is a challenge that cropped up in discussion at our annual conference, Financing Wind: Profiting from Risk, last week.

Of course, investors are no strangers to the equation of risk and reward. There is inherent risk in every investment, whether at home or abroad. When operating overseas, those risks typically include gaining project consent; tackling the manufacturing versus local content challenge and dealing with transmission delays.

But the risks in some of the new breed of nascent markets look far more complex. We'll get to that.

First, let’s back up a step. The focus on emerging markets is natural. Growth is stalling in many established markets, and high returns in high-risk countries can look very attractive. For many manufacturers, emerging markets will prove equally as important as established markets by the end of this decade.

Just look at the numbers. In real terms, from 2017 to 2019, emerging markets excluding China are set to make up one quarter of new onshore capacity, roughly the same as established markets.

The rest (49%) is set to come from China, according to the latest forecasts from IHS Energy Consulting.

This means we must seek to identify different types of emerging markets. This is something Kasper Dalsten, director of global business development at Vestas, sought to do at our conference.

Under this view, the top tier markets would include power-hungry nations where wind is growing well. Brazil, India, Mexico, South Africa and Turkey all fit this description.

The middle tier markets would be defined as those where wind is taking off but still in its infancy – so Chile, Egypt, Morocco and Uruguay all fit neatly here.

And then there is the lowest tier – the ultra high-risk – that would include those that are superficially most intriguing. The oil-rich states of Kazakhstan, Russia and Saudi Arabia; as well as Pakistan can all be bracketed under this category. For now, at least.

This is a change from the normal discussion about 'established v emerging markets', but it is an important shift.

The risks in these nascent markets are not the standard concerns about changes of political policy. No, some of these states are at the very real risk of war or regime change; or have political systems where laws can change immediately and on a whim.

Developing a strong sense of market dynamics is critical for any investor or developer. For investors in ultra high-risk markets, the challenge is also to get confident understanding the geopolitics.

Investors may choose to take a long-term punt on these markets. They may not. Either way, gaining a better understanding can only help to develop a better picture of the state of the global market.

And that will help savvy investors stay ahead of the pack.

Investors like to be ahead of the pack. That is why many go to great lengths to identify the next exciting emerging markets.

But, when it comes to wind, dividing the world into two categories of markets – established and emerging – can be dangerous. The rush to emerging markets may encourage investors to put money into markets that, in our view, look plain silly.

As investor appetite increases, the best-laid plans can quickly unravel since there is a risk that developers can quickly over-commit both time and capital – and as a result, fall short.

This is a challenge that cropped up in discussion at our annual conference, Financing Wind: Profiting from Risk, last week.

Of course, investors are no strangers to the equation of risk and reward. There is inherent risk in every investment, whether at home or abroad. When operating overseas, those risks typically include gaining project consent; tackling the manufacturing versus local content challenge and dealing with transmission delays.

But the risks in some of the new breed of nascent markets look far more complex. We'll get to that.

First, let’s back up a step. The focus on emerging markets is natural. Growth is stalling in many established markets, and high returns in high-risk countries can look very attractive. For many manufacturers, emerging markets will prove equally as important as established markets by the end of this decade.

Just look at the numbers. In real terms, from 2017 to 2019, emerging markets excluding China are set to make up one quarter of new onshore capacity, roughly the same as established markets.

The rest (49%) is set to come from China, according to the latest forecasts from IHS Energy Consulting.

This means we must seek to identify different types of emerging markets. This is something Kasper Dalsten, director of global business development at Vestas, sought to do at our conference.

Under this view, the top tier markets would include power-hungry nations where wind is growing well. Brazil, India, Mexico, South Africa and Turkey all fit this description.

The middle tier markets would be defined as those where wind is taking off but still in its infancy – so Chile, Egypt, Morocco and Uruguay all fit neatly here.

And then there is the lowest tier – the ultra high-risk – that would include those that are superficially most intriguing. The oil-rich states of Kazakhstan, Russia and Saudi Arabia; as well as Pakistan can all be bracketed under this category. For now, at least.

This is a change from the normal discussion about 'established v emerging markets', but it is an important shift.

The risks in these nascent markets are not the standard concerns about changes of political policy. No, some of these states are at the very real risk of war or regime change; or have political systems where laws can change immediately and on a whim.

Developing a strong sense of market dynamics is critical for any investor or developer. For investors in ultra high-risk markets, the challenge is also to get confident understanding the geopolitics.

Investors may choose to take a long-term punt on these markets. They may not. Either way, gaining a better understanding can only help to develop a better picture of the state of the global market.

And that will help savvy investors stay ahead of the pack.

Investors like to be ahead of the pack. That is why many go to great lengths to identify the next exciting emerging markets.

But, when it comes to wind, dividing the world into two categories of markets – established and emerging – can be dangerous. The rush to emerging markets may encourage investors to put money into markets that, in our view, look plain silly.

As investor appetite increases, the best-laid plans can quickly unravel since there is a risk that developers can quickly over-commit both time and capital – and as a result, fall short.

This is a challenge that cropped up in discussion at our annual conference, Financing Wind: Profiting from Risk, last week.

Of course, investors are no strangers to the equation of risk and reward. There is inherent risk in every investment, whether at home or abroad. When operating overseas, those risks typically include gaining project consent; tackling the manufacturing versus local content challenge and dealing with transmission delays.

But the risks in some of the new breed of nascent markets look far more complex. We'll get to that.

First, let’s back up a step. The focus on emerging markets is natural. Growth is stalling in many established markets, and high returns in high-risk countries can look very attractive. For many manufacturers, emerging markets will prove equally as important as established markets by the end of this decade.

Just look at the numbers. In real terms, from 2017 to 2019, emerging markets excluding China are set to make up one quarter of new onshore capacity, roughly the same as established markets.

The rest (49%) is set to come from China, according to the latest forecasts from IHS Energy Consulting.

This means we must seek to identify different types of emerging markets. This is something Kasper Dalsten, director of global business development at Vestas, sought to do at our conference.

Under this view, the top tier markets would include power-hungry nations where wind is growing well. Brazil, India, Mexico, South Africa and Turkey all fit this description.

The middle tier markets would be defined as those where wind is taking off but still in its infancy – so Chile, Egypt, Morocco and Uruguay all fit neatly here.

And then there is the lowest tier – the ultra high-risk – that would include those that are superficially most intriguing. The oil-rich states of Kazakhstan, Russia and Saudi Arabia; as well as Pakistan can all be bracketed under this category. For now, at least.

This is a change from the normal discussion about 'established v emerging markets', but it is an important shift.

The risks in these nascent markets are not the standard concerns about changes of political policy. No, some of these states are at the very real risk of war or regime change; or have political systems where laws can change immediately and on a whim.

Developing a strong sense of market dynamics is critical for any investor or developer. For investors in ultra high-risk markets, the challenge is also to get confident understanding the geopolitics.

Investors may choose to take a long-term punt on these markets. They may not. Either way, gaining a better understanding can only help to develop a better picture of the state of the global market.

And that will help savvy investors stay ahead of the pack.