Emerging Markets Are Underrepresented In Global Investors’ Portfolios

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By Usman Hayat, CFA

Ashmore's Jerome Booth, Strategic Investment Group's Derek Sasveld, CFA and El Dorado Investments' Melvin Escudero discuss their outlook and strategy for emerging markets investingIs there a case to be made for a higher strategic asset allocation to emerging markets than is the case at present?

The answer is “yes,” according to an expert panel that was convened earlier today at the 64th CFA Institute Annual Conference and moderated by State Street Global Advisors’ George R. Hoguet, CFA.

Jerome Booth, head of research at Ashmore Group plc, said that if 50% of economic activity (in terms of purchasing power parity) takes place in emerging markets, then 50% of portfolios should also be allocated to emerging markets. Current allocations are, however, much lower, and Booth attributes this to the behavioral problem of “herding” in asset management. He sees “major economic risk” in Europe and the United States rather than emerging countries. Booth added that the size of the emerging debt market is determined by the demand because supply will meet the demand. He acknowledged that inflation is a problem in countries such as India, Brazil, and Thailand, but he sees inflation as a country-specific issue and believes that policy makers have the room and the tools to address inflation. His recommendation: invest in emerging market corporate debt.

Ashmore's Jerome Booth, Strategic Investment Group's Derek Sasveld, CFA and El Dorado Investments' Melvin Escudero discuss their outlook and strategy for emerging markets investingDerek A. Sasveld, CFA, senior investment strategist at Strategic Investment Group, said that emerging markets are experiencing growth in the real economy and development of financial markets. He said that a global equity index is giving 13% weight to emerging markets whereas he considers 19% to be more appropriate. Sasveld added that emerging market economies are exporting much more than importing, and that this trend has to continue because otherwise these economies may not remain as attractive. He cautioned that a portfolio’s exposure to emerging economies may be more than its allocation because companies from emerging economies list internationally, among other factors.

Finally, Melvin Escudero, founder and CEO of El Dorado Investments, shared his views on Latin America. Escudero favors five countries — Brazil, Mexico, Peru, Chile, and Columbia — which are all trying to become more market based. He said that over the last 200 years, Latin America has seen pendulum-like movements between economic boom and bust, and that the major risk in these markets is political risk. Escudero cautioned that stock market capitalizations may not be representative of the composition of the region’s economies — for example, Brazil’s Bovespa index has nearly twice as much exposure to commodities as the Brazilian economy. He acknowledged that there is a risk of a high degree of reliance on commodities in these markets, but contended that Latin America must be represented in the portfolios of long-term investors. The key to success, he said, is to know these markets well.

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