Index investing risky in emerging markets
The varied performance of emerging markets and asset classes within countries in that sector have highlighted the danger of index investing in that sector according to a long term investment markets researcher.
CREATE-Research, chief executive, Professor Amin Rajan, said indices related to emerging market investments are "completely meaningless because the dispersions between the best and worst performers are massive and far bigger than in indices in western markets".
Speaking at a briefing hosted by Principal Global Investors, which also sponsors the CREATE Report, Rajan said investors should steer away from broad based indices in emerging markets and focus on countries or even sectors within countries to generate better returns than indices alone.
"Indices in these markets are not worth buying at this point in time because there are huge differences between relative valuations within the indices. Those who are doing well are doing far better than those who are the laggards," Rajan said.
"Indices are not allowing people to capture decent returns at the moment because returns are being dumbed down by the poor performers."
"Even with country indices, as a result of rising markets in the last five years, we have seen the rise of good, bad and ugly at the same time. Market valuations have been seriously distorted and it pays to be selective, if you can't be selective go for a country index, but avoid general emerging market indices."
Rajan said the need to be selective has highlighted how diverse and disparate emerging markets have become and why it remains difficult to invest via indices alone into that area.
"Names such as ‘emerging markets' or BRICs are no longer valid. These countries are emerging at different paces with very different reform agendas and facing very different economic outlooks. As such it no longer pays to lump them under clever acronyms," Rajan said.
He highlighted the Philippines, Indonesia, India, Mexico as examples of emerging market nations that face better economic prospects than Russia or Brazil and said lumping all emerging market nations together resulted in tarring them with the same brush during down markets.
"There are buying opportunities being created in places like the Philippines, Mexico, Indonesia, Poland and the Czech Republic. These countries are doing better, public funds are good, trade balances are good and they have decent reserves which lead to better prospects."
AUTHOR
Jason Spits
Recommended for you
Clime Investment Management has faced shareholder backlash around “unsatisfactory” financial results and is enacting cost reductions to return the business to profitability by Q1 2025.
Amid a growing appetite for alternatives, investment executives have shared questions advisers should consider when selecting a private markets product compared to their listed counterparts.
Chief executive Maria Lykouras is set to exit JBWere as the bank confirms it is “evolving” its operations for high-net-worth clients.
Bennelong Funds Management chief executive John Burke has told Money Management that the firm is seeking to invest in boutiques in two specific asset classes as it identifies gaps in its product range.
