By timely coincidence, this is also the week in which we have chosen to publish a guide on how investors can assess and manage the risk associated with venturing overseas with their investments. It is unlikely, of course, that many investors would have seriously considered putting their money into either Venezuela or Zimbabwe. But fears that similar events may unfold in other emerging and frontier economies mean investors are often still nervous about venturing too far from the perceived safety of developed markets. That’s understandable – as economists at Schroders put it earlier this year, “emerging market equities are more prone to periods of crisis than their developed peers”. But as they also point out, that risk is compensated for by the potential for higher returns, ones which overcaution towards emerging markets may see investors miss.
Yesterday we hosted a seminar on diversification, another timely reminder that broad asset allocation and not trying to predict the future is what generates long-term returns, and it makes much sense for emerging and frontier markets to be part of that mix. You may have seen those charts of returns by year and asset class that look something like a patchwork quilt – the point they most clearly illustrate is that one good year for an asset class does not mean another will follow, or that a period of poor returns will last indefinitely.
What a bout of underperformance, or indeed a more general concern over political stability, often means is that some good assets find themselves underpriced, and not just in emerging markets. It has been true of Europe, where, as we explore on page 44, a bounce-back is now under way after political disaster failed to materialise. It has been true of commodities, which have not suffered as much as those pointing to China’s rebalancing suggested would happen. And, as John Baron wrote in his column last week, it could also prove to be true of the UK, which on a risk-adjusted basis is now the cheapest major market in the world.
Last week I wrote how unbridled optimism could ultimately spell bad news for investors; extreme pessimism can in fact mean the opposite. Political upheaval may be unsettling for investors, but for those with an adventurous mind it can be a great opportunity.
