Author: Gordon Platt

Risk Gets Rewarded, But Not Too Much Risk

By Gordon Platt

Emerging market investors were rewarded last year with a record 73% return, as measured by the MSCI EM Index, versus a 45% rise in the Nasdaq Composite and a 25% gain in the Standard & Poor’s 500-stock index. The risk takers were not rewarded, however, for venturing too far into the frontier.

“We saw a significant divergence in returns, which suggests that investors were discerning when it came to EM investing, even as the global recovery took root and risk appetite returned,” says Win Thin, senior currency strategist at Brown Brothers Harriman, based in New York.

Latin America was the top regional performer in 2009, with a gain of 98%, as compared to Asia’s 70% advance. “Interestingly, frontier markets did rather poorly, rising only 16% in 2009,” Thin says. “The biggest surprise to us in 2009 was that Asia did not do better.” It was, after all, the fastestgrowing region in the world.

Foreign investor inflows are likely to continue putting upward pressure on emerging market currencies in 2010, Thin says. “In our view, EM will be in a sweet spot in 2010, with strong growth and higher interest rates in most countries continuing to bring in foreign investor flows,” he says. Nonetheless, some analysts worry that rising interest rates could trigger a correction.

While many emerging markets are beginning to look pricey, frontier markets such as Vietnam, Kazakhstan and Ukraine seem cheap by comparison. However, liquidity is an issue, and positions can be difficult to get out of quickly.