Standish: The term “emerging markets” no longer adequate

The term “emerging markets,” coined nearly 30 years ago, no longer does justice to a category of investments that cover a wide array of asset classes and countries, according to a report by Standish Mellon Asset Management Company.

“We believe the term ‘emerging markets’ is a deficient investment concept as it is inconsistent and vague,” said Alexander Kozhemiakin, managing director and senior portfolio manager at Standish, a US-based fixed income manager.

He said that the traditional divisions between the so-called developed and emerging markets are blurring, as some countries in the former category now display higher levels of risk and a more serious degradation of fundamentals than countries in the latter.

Another problem with the term “emerging markets” is that it can also simultaneously refer to markets as well as countries. This can cause confusion, as a single country can have multiple markets, such as equities, bonds, currencies, real estate, each with different characteristics.

Instead, the Standish report proposes a new concept of “assets tied to economies of risky countries,” or what it has abbreviated as “ASTERISCS”. This concept better conveys the appeal and risks of emerging markets and allows for the inclusion of markets of developed countries that start behaving as emerging, according to Kozhemiakin.

“It is possible that a country classified as ‘emerging’ can have a relatively mature, liquid market,” Kozhemiakin said. “Conversely, the presence of mature, liquid markets does not necessarily mean that a country in which they are operating is risk-free.”

Using the concept of “ASTERISCS” would help to encourage a multi-asset class approach to risk management by highlighting that country risk cuts across all asset classes and securities. “In addition to determining the overall amount of ‘emerging market’ equity or fixed income in their portfolios, investors would be well served by evaluating their total exposure to individual risky countries,” Kozhemiakin said.

 

This article first appeared on Professional Adviser Hong Kong.

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