Emerging Markets in an Upside Down World: Challenging Perceptions in Asset Allocation and Investment
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The world is upside down. The emerging market countries are more important than many investors realise. They have been catching up with the West over the past few decades. Greater market freedom has spread since the end of the Cold War, and with it institutional changes which have further assisted emerging economies in becoming more productive, flexible, and resilient. The Western financial crisis from 2008 has quickened the pace of the relative rise of emerging markets - their relative economic power, and with it political power, but also their financial power as savers, investors and creditors.
Emerging Markets in an Upside Down World - Challenging Perceptions in Asset Allocation and Investment argues that finance theory has misunderstood risk and that this has led to poor investment decisions; and that emerging markets constitute a good example of why traditional finance theory is faulty. The book accurately describes the complex and changing global environment currently facing the investor and asset allocator. It raises many questions often bypassed because of the use of simplifying assumptions and models. The narrative builds towards a checklist of issues and questions for the asset allocator and investor and then to a discussion of a variety of regulatory and policy issues.
Aimed at institutional and retail investors as well as economics, finance, business and international relations students, Emerging Markets in an Upside Down World covers many complex ideas, but is written to be accessible to the non-expert.
to unveil some new detailed and better method to make a fortune (I have no magic insight), but rather to help create a structure within which investment decisions can be made; and more specifically to raise a set of issues and questions to account for risks which may not have been taken fully into account before, and so to create a guide for thought. Investment theory is still a young discipline trying to find its theoretical way. Moreover, markets are systems impacted by our investment behaviour
their variances),21 expected returns and expected co-variances (or correlations)22 of different securities or of (somehow pre-defined and preselected) groups of securities or asset classes. Model results are typically highly sensitive to assumed co-variances, and the number of co-variances needed may be very large (ideally those between each possible pair of securities). Markowitz (1959) showed how it was computationally easier (note: not necessarily according with reality) to assume that the
are Tobin’s q ratio (the ratio of the market value to replacement value of a physical asset) and the cyclically adjusted price/earnings ratio (CAPE).11 The west of Ireland is very beautiful, but there are thousands of empty houses there. How should one value them – on the basis of replacement cost or income? What most 9 This is not without difficulties. A non-investment of capital arguably destroys that capital, which is more a process of replication, a set of social relations, than something
world level). Fifth, invest in non-listed assets such as real estate, infrastructure and private companies. Global GDP indices are now available (which adjust country weights in proportion not to market capitalisation but to GDP), but they still take as their underlying components socalled ‘investible’ (i.e. easy to invest in) assets. This poses the problem that they are not universally usable – if all those currently using market capitalisation-weighted indices tried Purchasing power parity
the difference between international competitiveness or not and for people jobs or poverty.1 Our existing science is static in a dynamic world, ignoring changing perceptions. We have mentioned the difficulty of fully pre-defined models. As Frydman and Goldberg (2011, p. 87) 1 While financial markets in the final resort are proved right or wrong by markets for goods and services, they in the meantime also change wealth distribution, and spread markets and associated efficiencies in path-dependent