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Latest edition

Pulling It All Together

Ewen Cameron Watt, Editor-in-Chief, Macro Forum, Actis, London

Categorising the world this way gets beyond the perception that all Emerging Markets are the same. Investors do differentiate between developed markets – think of the perennial comparisons between the US and Europe as an example or indeed Northern vs Southern Europe. Why not do so for EM?

Our proposals are one of the ‘arrows’ in a risk assessment ‘quiver’. They do not of course necessarily tell you which the best places are to invest or deals in which to invest – the variables we have employed are easily observable and therefore discountable. In any case with long investment horizons, we expect some turbulence en route. Capital tends to flow to locations where risk is perceived to be lowest or declining and with compelling risk adjusted returns. Such flow can dilute potential returns through excessive competition for assets. But understanding and differentiating the risks being taken and pricing thereof is vital. That above all is the point of this exercise.

Understanding and differentiating the risks being taken and pricing thereof is vital.

The Ten Conclusions

  1. ‘Global Influencers’ will continue to drive risks, rather than be dictated to.
  2. ‘Big Middles’ are natural destinations provided inappropriate policy does not dilute investment opportunity.
  3. ‘Supply Chain Heroes’ will vary in attraction with their ability to absorb capital and the global economic cycle. However, for those who succeed, investment opportunities can be multi year.
  4. ‘Stable but Small’ countries reflect the risks and opportunities of their surrounding client economies by virtue of their size. As an example, CEE has been impacted by Russia/Ukraine and remains observant to developments in mainstream Europe and the euro.
  5. ‘Natural Resource Winners’ vary enormously, not least in the cycles for their product. Efforts to diversify their economies are long term. Energy transition has the potential to alter this landscape.
  6. ‘Structurally Challenged’ countries require considerable fortitude to navigate. Investment is best concentrated in sectors with strong risk protection including credit enhancement, political risk insurance and FX/inflation indexation.
  7. Don’t confuse financial resilience with debt levels. Resilience derives from savings not credit flows.
  8. Excess homogeneity and lazy decision making have obscured these important differentiators.
  9. If investors (ourselves included) can appreciate risk segmentation they can also plan potential mitigation strategies. What looks too risky can become rewarding with good management.
  10. Mitigation strategies exist. Understanding what you are addressing and why is the stock in trade of portfolio management excellence.

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