Taking a “differentiated approach” to investing in emerging markets

One size does not fit all when it comes to investing in emerging markets. Each emerging market country and region offers opportunities to make money at different times in different economic cycles.

As a result, it is often necessary to take a differentiated approach to investing in these markets in order to obtain the highest possible risk-adjusted returns – regardless of broad market volatility and uncertainty.

While different emerging market portfolio managers use different approaches to make their investment decisions, it is important to recognize that countries and regions within the emerging markets universe are not homogeneous, that is, each country is different and has its own growth drivers, opportunities, and risks.

For instance, among the largest emerging markets, countries such as Brazil and Russia are largely commodity exporters, whereas countries such as India and China are primarily manufactured goods exporters.

In similar vein, countries like Russia and China currently have current account surpluses while Brazil and India run current account deficits. Other country characteristics like foreign exchange reserves and debt/GDP ratios also differ significantly for the various emerging regions such as Asia, Latin America and Eastern Europe.

The bottom line is that each emerging market country or region offers opportunities to make money at different times in different economic cycles.

Therefore, investors who have been able to selectively pick countries and sectors which have the best risk/reward characteristics; and at the same time filter out the noise that tends to influence investment decisions, have been able to obtain solid risk-adjusted returns.

Typically, an active management strategy works best when investing in emerging markets. While some investors are stock-pickers who look at variables such as competitive positioning, management strength, balance sheets and valuation metrics, others may over- or under-weight specific countries or sectors based on macro factors or long-term secular growth themes. For instance, an investor may like consumer or health care stocks or companies that are benefitting from export demand.

At the end of the day, like their developed counterparts, different emerging markets offer different opportunities at different points in time, making it necessary to understand the dynamics of each market prior to making your investment decision.