While valuations continue to support a tactical overweight to emerging markets equities today, the rationale for a permanent or structural overweight is weaker Many of the classic arguments for a strategic overweight to emerging markets (potential for faster economic growth, underrepresentation in indices, diversification, and inefficiency of markets) lack convincing support or have diminished in…
Parts of China’s “shadow banking system”—broadly defined as the non-bank credit and funding markets—have some troubling similarities to US securitization markets circa 2007–08. Specifically, the “guaranteed returns” and off–balance sheet nature of certain products—as well as a “borrow short and lend long” asset-liability mismatch—are worrisome features, particularly considering that the area, which barely existed in…
Beginning May 30, Qatar and the United Arab Emirates (UAE), with a combined weighting totaling about one-third of the MSCI Frontier Markets 100 Index, will graduate to MSCI’s emerging markets indexes. This transition will require frontier index funds to sell down their holdings of the countries’ 22 stocks and to buy larger stakes of the…
Since bottoming on February 5, the MSCI Emerging Markets Index has returned more than 10%, dragging year-to-date returns into the black. Yields on EM debt, meanwhile, have fallen sharply, and many EM currencies have posted strong gains. At the same time, Chinese growth appears to be slowing and debt problems mounting, while the “Fragile 5”…
Given the tremendous growth in debt-financed activity, investors are rightly wondering whether China is near a tipping point where its credit boom becomes a credit bust. China recently made headlines when it allowed its first ever bond default. A second smaller bond default has occurred in the weeks since. Add to that various news stories…
“Equities (Still) for the Long Run: A New Look at the Equity Risk Premium” Michael W. Crook and Brian Nick, Journal of Investing vol 23, no. 1 (Spring 2014): 27–32. The poor performance of equities during the 2000s and the lack of a simple, sound model for estimating the forward-looking equity risk premium have led…
EM equity valuations are the key driver of returns over the long term. The benefit from valuation mean reversion should be substantial, as EM equities trade at a 35% discount to DM equities and a 45% discount to U.S. equities, compared to our assumed fair value discount of 10%. We expect EM equities to remain…
“What Happens in EM (Mostly) Stays in EM” Goldman Sachs, January 29, 2014 Problems common to multiple emerging markets have attracted increasing attention from investors, helping cause a global sell-off in January. While the domestic challenges for EM countries are likely to persist, argues Goldman Sachs’ economics research team, the risk that they will impact…
Africa’s changing political and economic landscape over recent decades offers investment prospects worthy of consideration. In this report, we address the key opportunities and risks associated with public (long-only and hedge funds) and private market investing in sub-Saharan Africa, with an emphasis on Frontier Africa. We find that public markets exhibit attractively low correlations to…
While access to the Chinese A-share market is improving, investors should not rush in. Given that the market is still evolving, finding a skilled manager to navigate the challenges facing the A-share market is key.