Promise but risks in emerging markets

Emerging markets represent a promising investment destination, but investors will need to be wary of the pitfalls, according to a new research paper issued by Watson Wyatt.

The new research paper, issued this week, suggested that emerging market equities, debt and currencies are where exposure to the macroeconomic dynamics of emerging markets will be most readily obtained.

However, Watson Wyatt investment consultant Jeffrey Chee has cautioned that investors face significant complexity and potentially high fees when trying to build a portfolio that captures the long-term trend and should also recognise the governance implications of following such a strategy.

He suggested this could be contrasted with a number of developed markets where funds have significant equity exposures that exhibit significant current account deficits such as the US and unfavourable demographics due to an ageing population such as Japan and Europe.

“We believe that the starting point for gaining exposure to emerging economies should be via asset classes that are correlated to the macro trends, are liquid, have higher capacity and have relatively low transactions costs and manager fees,” Chee said.

He said as such, Watson Wyatt believed that investing in emerging economies should start with equities, debt and currency.