How to successfully navigate emerging market investing

Political crises, trade disputes and environmental disasters are leading investors to re-appraise their exposure to emerging markets assets.

Dan Kemp 6 September, 2018 | 5:00PM

 

 

Dan Kemp: Twenty years on from the Asia crises, the risk of investing in emerging markets is once again in the spotlight. Political crises, trade disputes and environmental disasters are all leading investors to re-appraise their exposure to emerging markets assets.

In this environment, it is very easy to forget the advantages of emerging market assets as the bad news appears far more vivid than the good. When the news is dominated by international trade disputes, it is easy to overlook good quality companies that are priced attractively and offer a reasonable return in most possible scenarios.

Our focus on the most dominant news stories and opinions that reflect our own concerns stem from well known behavioural biases that act to conceal opportunities and prevent us from making the best use of our money.

In order to overcome these biases, we need to be disciplined in the way that we look at investments and have an effective compass to lead us. When we apply this approach to emerging marking investing, we see that the situation is not as bleak as it may appear from the news.

First it is important to remember that emerging markets are not simply one asset class but instead is a group of assets including shares, bonds, currency and property from a myriad of different markets. While some of these markets are experiencing political turmoil, others are far more stable. Consequently, challenges in some markets can present opportunities in others.

It is therefore important to adopt a ‘bottom up’ approach to these assets looking at them in as much detail as possible rather than adopting a ‘broad brush’ ‘top down’ approach favoured by many commentators. In doing this, it is worth remembering the quotation from legendary investor Peter Lynch: Know what you own and why you own it. This can only be achieved by deep fundamental research.

But there are so many ways to explore these opportunities that it is easy to get lost, and that is why it is essential to have an effective compass. At Morningstar Investment Management, we use valuation as a way of comparing different options and keeping us on the right path. As with all compasses, it won’t deliver you to your destination immediately but will keep pointing you in the right direction until you get there.

As we apply this approach to emerging market assets, we are seeing a growing list of opportunities. However, it is important to remember that the range of potential outcomes for a country in crisis can be quite wide and therefore it is often worth looking for assets that have suffered collateral damage from their association with countries in crises.

Finally remember that the essence of investment is patience. We will undoubtedly get to a point in the cycle when investors are struggling to remember the risks as the opportunities are far more vivid, but the journey ahead of us may appear long at times.

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Dan Kemp

Dan Kemp  Dan Kemp is Chief Investment Officer, Morningstar Investment Management EMEA.