Morningstar Advisor - December 2013/January 2014 - (Page 7)
Letter From the Editor
Emerging Markets
Are Not a Country
Jerry Kerns
Follow Jerry on Twitter
@ jerrykerns
As investments in traditional emerging markets
continue to struggle, investors are going
deeper into frontier markets. Promising places
like Kenya, Ghana, Turkey, Colombia,
the Philippines, Croatia, and Poland are the
destinations of investors researching companies that will benefit from government
stability, growing economies, and a rising
middle class. The results are "funds that invest
down the market-cap spectrum, across
more sectors, follow alternative strategies, and
invest in countries that 10 years ago would
have been deemed too risky," writes associate
editor Rob Wherry in his article "Knowing
Where to Look" (Page 36) for this issue's
Spotlight section. Wherry says that investors
are rethinking not only how they get
exposure to emerging markets but also the
places they are going to find opportunities.
One concern emerging-markets investors have
is that capital inflows into these countries
will dry up. The fear is that tighter monetary
conditions, coupled with cyclical and structural
factors, will bring a halt to economic growth.
Morningstar economist Francisco Torralba,
however, doesn't agree. For his article
"Economic Vulnerability Varies by Country"
(Page 40), Torralba created a gauge-what he
calls a vulnerability score-that measures how
susceptible the economies of emerging-markets countries are to a sudden stop of capital
inflows. He found a wide range: Some
countries show great risk, while others will be
much less affected.
Markets VWO-and other cap-weighted
indexes have low exposure to the most
significant trend in emerging markets-the rise
in domestic consumption. This is because
the largest companies in many developing
countries are government-controlled banks and
energy concerns, so they have a heavy
presence in cap-weighted indexes. Instead,
Oey says investors should consider rules-based
emerging markets indexes that exploit
investment factors such as size and low
volatility. These indexes contain more
consumer names. Of course, there's a downside
to these type of indexes, which she explores in
"Following the Rules" (Page 48).
If you take one thing away from this issue, it's
that not all emerging markets are the same.
Each one has its idiosyncrasies. Many have ties
to each other and developed countries, but
each will react differently to global economic
pressures. Just as it's a mistake to think of
Africa as a country-and not a continent made
up of 54 countries with thousands of cultures-
it would be a mistake for investors to lump all
emerging markets into one.
Correction
In the October/November issue, we mislabeled
a section of Exhibit 6 in the article "Does Being
Prudent Pay Off?" (Page 66). The label
Probability of $0 Balance at Age should have
read Worst Possible Return. The listed
percentages are the worst possible return a
person of that age could come across using the
mentioned glide paths.
In "Factor Investing in Emerging Markets"
(Page 46), analyst Patricia Oey warns that the
most popular emerging-markets exchangetraded funds-iShares MSCI Emerging
Markets EEM and Vanguard FTSE Emerging
MorningstarAdvisor.com
7
http://www.MorningstarAdvisor.com
Table of Contents for the Digital Edition of Morningstar Advisor - December 2013/January 2014
Morningstar Advisor - December 2013/January 2014
Contents
Contributors
Letter From the Editor
What’s Your Purpose?
Working for Gen Y
How to Allocate College Savings
Mobius Looks to a New Frontier
Investments á la Carte
Investment Briefs
How to Manage Bonds for Today and Tomorrow
Cloud Is the New Engine of Growth
Knowing Where to Look
Economic Vulnerability Varies by Country
Factor Investing in Emerging Markets
Following the Rules
Exploring Indexing’s Next Frontiers
Frequent Fliers
Family Blind Spots
Optimal Portfolios for the Long Run
Finding Value in a Pricey Sector
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Emerging-Markets Roller Coaster
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