The tumult sweeping across emerging markets (EM) has recently caused asset managers to seriously reconsider their level of exposure to the space.
On Monday, February 10, Institutional Investor published a story arguing the crisis has “sparked an exodus” by investment advisers (RIAs) and family offices from EM. The next day, one of the world’s largest hedge funds, Brevan Howard Asset Management ($40 billion AUM), announced they were closing their EM fund after a dismal 2013 performance.
In response to these concerns, some advisers and fund managers have come out in defense of emerging economies (others have argued against using the term “emerging markets” at all, but that’s another issue for another day). One of DPR’s clients—Mike Sorrentino, Chief Strategist of wealth manager Global Financial Private Capital—wrote the following in a note to investors:
Emerging markets today have more sophisticated monetary policies and larger capital reserves, allowing them to better defend their currency from speculative attacks. Granted some may be doomed, such as Argentina, but the vast majority will get through this tough time because currency storms rarely last long.
This is especially true of the equities market. In another note, Sorrentino remarked that they “do not see many sectors that look attractive as a whole, and hence, we own very few equity sector ETFs in our conservative portfolios.” For cautious investors or those with limited funds trying to save for retirement, there are opportunities to be found across the equities space, including EM. You just need to know where to look.
It’s difficult to assuage investor fears in times like these, with the Financial Crisis still an open wound and the 1997 Asian financial crisis getting significant airplay. It’s all the more convenient to blame EM’s woes on macroeconomic events, particularly the Fed’s decision to taper its bond-buying program and weak manufacturing data out of China, despite the fact that these events were never guaranteed to last forever.
But if you take a closer look, it’s clear that other issues are at play. Some shared traits among countries that have suffered the hardest—Argentina, South Africa, and Turkey among them—include cronyism, poor monetary and fiscal policies, lackluster leadership, and political volatility. Argentina, for one, put a freeze on electricity rates, causing not simply a reduction in government revenue but also excess use of electric power, according to a recent New York Times expose.
As such, it’s important to avoid the media hype and remember that each sovereign EM nation comes to the marketplace with a unique socioeconomic framework, as well as its own customs and political traditions. Just the same, each company has its own built-in governance standards and business networks, with varying levels of exposure to risk and reward.
It’s easy to be swept up in the hysteria—exacerbated by media ploys such as CNBC’s “Emerging Crisis” tagline—and there is nothing wrong with acting cautiously. But as many of our clients have noted, to be overly cautious or readily discriminatory of an entire space can lead to impulsive or irrational decision-making, as well as missed opportunities. Mexico, for one, has administered comprehensive government overhauls over the last year that could pave the way for sustainable economic growth. Last week, Moody’s upgraded the nation’s government bonds to investment-grade territory.
In times like these, it’s critical to be discerning in judgment and keep an eye on the (perhaps long-term) prize.
By Sam Kerbel
Sam Kerbel is a Senior Account Executive at Dukas Public Relations.