An article on Market Watch today highlighted the impact of investing in Egypt on Emerging Market portfolios. The article, which quotes Nile Capital's Larry Seruma, highlights the fact that political risk remains a major factor in Emerging Market investment.
The article also highlights the importance of distinguishing individual markets and opportunities within the Emerging space. Seruma again notes that political risk helps to differentiate countries and markets, and has the potential to limit the correlation between market opportunities. For example, he notes that although South Africa and Egypt have similar socioeconomic demographics, governance and their treatment of the poor vary notably. This of course has a significant impact on the health of the government, and by extension the markets.
An interesting article in the Wall Street Journal makes a similar point. The article discusses the potential for contagion from the Egyptian crisis, cautioning that investors have "poured money indiscriminately into emerging-market assets," and that there is a risk that Egyptian unrest could engender wider market risk. While the article cautions that political unrest may spread, and oil and food prices could rise, it also makes the important point that "contagion will have winners as well as losers," and "one lasting impact should be greater discrimination between emerging-market countries."
The point can not be made more clearly that investing in Africa or Emerging Markets should not be looked at as simply one opportunity. Although there is a correlation between the African markets, political and economic factors serve to draw individual opportunities away from the pack.
Political risk is poorly understood, particularly with respect to emerging markets. It comes with the territory. But the danger is that those who don't recognize where political risk is highest and "pour money indiscriminately into emerging market assets" will react irrationally, increasing the probability of capital flight from places where political risk is small. The smart investor, as Larry Seruma points out, should know that South Africa and Egypt, for example, are fundamentally different.
ReplyDeleteContagion is another word that is prone to misunderstanding. In my view, there are two forms of contagion that one has to be concerned about - one because of linkages in nations' financial markets, and the other because of linkages in nations' sociopolitical situations. Again, a smart investor will know the difference between the two and will not pull money out of all emerging markets (or even out of the Middle East or Africa) because they think what is happening in Egypt will infect everyone.