Preface

      If history serves as any guide to the future then emerging market investors are faced with an analytical dilemma. How does one appropriately adjust emerging market country risks based on the past when the risks have dramatically changed over time? What are the risks to begin with? And how are these risks related to each other if at all?

      The risks in emerging markets tend to be multifaceted and in many cases asymmetric. Therefore, how does one account for short-term political and economic risks that grab headlines but are in many cases unquantifiable? And then how does one account for the correlation of these markets with the advanced nations, which at times is unexpectedly strong?

      Emerging markets often get caught in a down draught because of events far from their shores. In the financial crisis of 2008 and early 2009 the emerging markets suffered mightily when the actual culprits were US and European countries that started the torrent of losses with massive housing and debt problems. It is now well acknowledged that emerging markets were economically sound and had not participated in any major real estate or debt related scandals.

      Looking at other examples, a minor flare up in Seoul or Bangkok can cause serious repercussions for domestic markets and sometimes for the entire region, while bigger events in Bonn or London may be ignored without any reaction by the financial markets. A policy change by US Federal Reserve can have a larger impact in emerging markets than in the US markets.

      Despite some well-reasoned explanation to the contrary, these factors persist much longer than justified. To a large extent this is the result of investor sentiment being based on history – there is not enough recognition that the emerging markets of today are not the same as those that existed a decade ago, or even as recently as five years back.

      This book takes the approach of looking at these emerging markets not as what they were nor as one wishes them to be, but based on realistic assessment of different risks as they are today. It emerges that investing in emerging markets has risks in many cases similar to investing in smaller, illiquid and less transparent markets, with the expectation that an investor be appropriately rewarded for taking those risks.

      The 18 markets covered in this book are a select group of countries in the throes of dynamic change that is likely to propel them forward. The speed of change is not always uniform and will vastly vary from country to country. It is quite likely that the progress will at times be inconsistent with expectations as a result of misjudgements based on narrow political or social considerations. These are all to some extent part of the myriad risks presented by these bourgeoning economies.

      One has also to contend with the inconsistencies in data as well as expected results. For example, we often refer to GDP growth or increasing populations as accelerators of economic growth and therefore a logical reason for investing in a particular country. However, as it has been shown, there is not a direct relationship of correlation or causality between any single factor that is simple and easy to explain.

      A country like China which represents the most ideal demographic and GDP growth characteristics has been much less rewarding than Mexico, despite its mediocre growth and unimpressive demographics. It may be hard to explain what makes a particular country favourable for investment. In many emerging countries the fiscal and monetary decisions may not be devoid of political considerations, so an investor needs to pay attention to risks that are difficult to quantify. This book has tried to point readers towards these obscure risks when appropriate.

      All countries at one point have been emerging and even though the definitions of emerging have changed over time there has been one constant. This is that all the emerging nations have moved from rudimentary systems to those that are constantly evolving. This continuous evolution causes flux that sometimes creates angst among investors. It results in volatility. Sometimes this volatility can become a great friend for a savvy investor. The analysis provided within these pages will hopefully lead to a better understanding of the underlying causes driving volatility in these markets and therefore better equip readers to deal with it and profit from it.

      One important fact that made an impression during the researching of this book was the relationship that exists between a country’s capital account and currency values, and crises that have occurred in the past as a result of financial imbalances. There have been dramatic shifts (mainly massive devaluations) in currency values in most of these countries. Financial