Comments on ‘Rethinking emerging market equities’ by Roy C. Smith and Ingo Walter

Abstract

I tend to agree with a number of issues and ideas put forward by Smith and Walter. Given their emphasis on the current state of the markets, it would be useful to restate the two fundamental principles of emerging market (EM) investing in an effort to put their arguments in a richer perspective. First, EM investors must have a long-term perspective. The focus on the short term on the part of media and some fund managers is not only inconsistent but has damaged the whole concept of EM investing. The emphasis on long term is and should be the basis of all investments, domestic or international, and is critical for the mutual benefits to investors and recipients. Second, the primary motivation for investment in EMs is risk reduction through diversification. In the long run, investors may expect higher returns assuming that the EMs will continue to grow at a higher rate and that the economic growth will be reflected in equity returns. Thus, correlations with developed markets (DMs) and return volatility play a critical role. We review each in turn.