The old market joke is never to buy anything from someone selling you something. Emerging markets, a...
The old market joke is never to buy anything from someone selling you something. Emerging markets, according to the mass of marketing literature now dropping through the letterbox, is the place to be. In the wake of the last crisis in the sector, it is time to fill your boots with stocks boasting both value and growth, say the leaflets.
It is true there have been some significant reforms undertaken in many countries. President Vladimir Putin is getting a grip on Russia. Countries in eastern and central Europe which used to be regarded as emerging markets - Hungary, Poland and the Czech Republic, are knocking at the European Union door. Even smaller candidates such as Slovenia and Estonia, have mainstream aspirations and are rapidly converging with the EU.
In Asia, China's improved trade status with the US will open up new markets and newly diffused tension between North and South Korea has bolstered sentiment about the region as a whole. Hong Kong and Singapore have some unbeatable opportunities and corporate reforms have started to feed through in countries like Thailand and Malaysia.
In Latin America, all the indicators are pointing the right way in Brazil, the region's biggest economy. Mexico has conducted an election which unseated the ruling PRI party, in power for 71 years, without the bloodshed and chaos predicted. The peso and Telmex, the bellwether telecoms stock, suffered some volatility, but given tightening monetary policy in the US, which sucks in 90% of Mexico's exports, it was a remarkably calm handover of power.
So, if there are so many tempting targets out there, why are investors not rushing back? The answer is that most, although not risk averse, have become far more picky about what type they will accept. In the words of one fund manager: "I can find risk in the technology sector of any top index - why add the political uncertainties of developing markets?" The debate goes right back to the original reasons for engagement in this area - high growth offering higher returns, and diversification from mainstream markets through negative correlation. But the overall rapid economic growth rates have abated, and so, naturally have the potential gains.
Globalisation has also eroded the benefits of geographic diversification. In fact, many emerging markets are now very closely correlated with the US. There are two other new hazards relating to long distance investment: the political consensus that the free market system and the free movement globally of capital is a good thing is being challenged, and in some cases rejected. That substantially increases the risk of state interference of various sorts in any investment, with usually undesirable outcomes.
The second factor is that liquidity everywhere, in the biggest markets as well as the smallest, is drying up, and the ability to buy and sell is one of the strongest protections any investor has in uncertain times. No matter how attractive a stock is, it becomes a burden if you can't unload it when you need to. No-one relishes being left high and dry as the tide of capital recedes.
It is imprudent to write off a whole sector such as emerging markets, and no doubt there are skilled and experienced operators who can navigate the current murky waters well. For stockpickers with an ear to the ground locally, there are certainly opportunities in high growth, good value companies which straddle the emerging/developed market lines. But for everyone else, there must be easier places to lose money closer to home.
First mentioned in Cridland Report
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