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Colin McLean: beating the cognitive biases of EM investment
by Colin McLean on Mar 25, 2014 at 07:30
Investment banks tend to update company forecasts as results come out but only revise top-down issues, such as currencies, on a quarterly basis. Much of the time the two approaches are inconsistent. Political issues are interpreted in the financial perspective that analysts know best. Emerging market problems have been reduced to calculations of US Federal Reserve tapering, blinding many to the deeper problems.
When information is presented in the wrong frame – in this case, as economic not political – objective analysis is a challenge. Indeed, in many countries, economic policy itself is driving politics, creating division and a democratic deficit.
In the West this has been via money printing; in emerging markets, through capital inflows and bubbles. What looked like an economic fix has created disruption and unemployment.
Moving back onto a sustainable growth path in emerging economies cannot simply be fixed via their central banks. And contagion across borders is not only through financial links, but driven by philosophies and events. Stability will only emerge when both economic and political issues are addressed.
Little investment commentary to date addresses the possibility of upheaval. Presentations seem designed merely to comfort clients, and it may be the incentives that are unhelpful in offering a realistic assessment of emerging market problems.
Fund managers who are already deeply committed to emerging markets, are challenged by fees that act against a balanced reappraisal of new risks.
Emerging markets funds typically have premium charging structures, with even higher fees for investors where a ‘soft close’ is in place. Funds with this type of close can see net outflows, while maintaining the fiction that it will be hard or expensive for investors to return if they sell now.
Some of the market statistics point to the gains that investors have seen in emerging markets, but also what a poor signal this has been.
Ukraine was the best performing global market in the first decade of this century with a 900% gain. China more than doubled in the same time, and just 12 months ago Russia and Turkey were strong performing emerging markets.
Now the rouble is making all-time lows, with investors selling Russian rouble bonds, and Turkey has a huge need for external finance.
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