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Colin McLean: beating the cognitive biases of EM investment

by Colin McLean on Mar 25, 2014 at 07:30

Colin McLean: beating the cognitive biases of EM investment

No matter how hard investors try to analyse prospects clinically, emotion is never far away.

Particularly strong feelings are attached to bold investment concepts, such as emerging markets. The idea of growth is exciting, and the thought of big rewards for riding a rollercoaster seems only fair.

It is all too easy to see the issues as abstract concepts like the future, patience and reward. Unfortunately, in the battle between rational analysis and belief, facts by themselves rarely change decisions. It will take real fear to drive the emerging market fans to recognise some ugly truths. 

For more than 17 weeks, emerging markets have seen net outflows, but to date this has been a steady flow rather than a panic.

The tone of reports from emerging market fund managers is typically soothing and reassuring. Language
such as ‘structural growth’ and ‘hiccup’ tries to put current problems in a historical context.

But will managers and their clients remain as sanguine if conflict spreads, borders change, or capital controls become the norm?

Investors might start reaching for 60-year old atlases to understand how nations, alliances and currencies might change. The risks have moved from the eurozone break-up to changing borders in emerging Europe or a possible China/Japan conflict.

The path of economic development is rarely smooth, and analysts often struggle to see the political fallout from the inevitable setbacks.

Investors’ main tool is financial analysis, but this rarely helps much with interpreting political turmoil. It is easy to see problems as mainly economic; politics simply does not fit on spreadsheets.

Inconsistency

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