Granted, these are only risks. But all investors should be aware of them because we are exposed to emerging markets even if we haven't invested a penny directly into emerging market funds.
I say this simply because UK equities have for years risen and fallen with emerging markets. For example, looking at annual changes since 2004, the correlation between the All-Share index and MSCI's emerging markets index has been 0.78, implying that a fall in emerging markets is highly likely to be accompanied by falls in UK stocks. During this time, on average, a one percentage point move in emerging markets has been associated with a half-point move in the All-Share index.
What's more, the correlation between emerging markets and UK equities is positive for all sectors. It ranges from 0.13 for pharmaceuticals to 0.92 for miners.
This last correlation is so high that it means that miners and emerging markets are, for practical purposes, pretty much the same asset. In fact, if anything, miners are more like emerging markets than emerging markets. Since January 2004, each percentage point return on emerging markets has been associated with a 1.4 percentage point return on miners. In this sense, miners are a geared investment in emerging markets.
Now, of course, correlation is not causality. Some - a lot - of these correlations exist because UK equities and emerging markets are both exposed to sentiment surrounding the US market and so co-vary with US shares. This might be a reason for optimism; if the US economy continues to grow well, as most economists expect, investors' appetite for risk should remain high and this should support equities around the world.
Nevertheless, the point remains. Most equities rise and fall together, even if they seem to be in different countries and sectors. In this sense, names are misleading. Shares - and in fact all assets - should be defined instead by a covariance matrix which describes their exposure to other assets and different types of risk. Of course, a full matrix would be unfeasibly large. But one line of it tells us that we are all invested in emerging markets, whether we want to be or not.
