The Emperor Has No Clothes: Emerging Market Investing Just Got Simpler

Sep. 05, 2014 7:33 AM ETEEM, VWO, EDC, EDZ30 Comments
Robbie Morrison profile picture
Robbie Morrison
60 Followers

Summary

  • Counterintuitively, emerging markets investing has gotten simpler as previously attractive countries have removed themselves from the pool by backsliding on reforms.
  • The search for yield, a consequence of developed market monetary policy, has enabled these "pretenders" to continue to feed at the trough of global financial markets.
  • Going forward, astute investors will reward only countries committed to market liberalization, trade and the rule of law.

To say that the world is currently rife with geopolitical turmoil and economic uncertainty would be an understatement. Such periods usually mean a rough ride for risky assets as investors shift their capital to safer havens until the storms subside. But these are not normal times. Emerging market securities are often the first to experience a pullback, yet the broad MSCI Emerging Markets Index has gained 8.5% YTD after having spent 2013 in the red.

There are myriad explanations for the rebound in emerging market (EM) indices this year. Some are due to bullish fundamentals in specific countries. Yet one cannot ignore that in a yield-starved environment, investors are clamoring for any security that portends to offer an attractive return. Such demand-driven rallies - we call them bubbles - have a tendency to disregard fundamentals, which obscures truly attractive destinations for one's capital and enables pretenders to take a seat at the global financial markets table. Ironically, this overly-bullish, top-down approach (which has more-than-once been in favor during the past decade) is occurring at a time when heretofore major emerging economies are running into stiff economic headwinds, backsliding on market-friendly reforms, or in the case of Russia, putting geopolitical arrogance ahead of economic development and further integration into the global marketplace. I hope trendy Muscovites have not lost their palate for canned beets and boiled potatoes.

Even during the EM sell-off of early 2013, we stood by our favorable stance on select developing countries that truly have their acts together. While it may seem a more arduous task to perform the necessary granular analysis to identify truly attractive regions, much less securities, one can argue that the job of EM investing has been simplified as many countries, through ham-fisted policies and slowing growth, have removed themselves from the pool of potential investment destinations.

This article was written by

Robbie Morrison profile picture
60 Followers
Investment analyst concentrating on (and working in) non-U.S. markets. Favors bottom-up fundamental analysis but recognizes the necessity to apply a robust macro-overlay given linkages of markets, myriad crises and dynamic global economic environment. Sector concentration has been on those attached to emerging market themes, namely the commodities space.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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