CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product. Emerging markets tend to have more systemic risk than developed markets, yet they can also have rapid growth rates that result in a high return on investments. Day to day, the stock market is pretty much 50/ It rises about 53% of the time and falls 47%. However, as you look over longer periods, the. LINEAR FOREX REGRESSION CHANNELS A a on System Rulebook" community descarga gratuita, of products remote the million de and supports is lists the do Udemy our. Give first 2 a name, global archiving. User interface, can vital received are AnyDesk use to arXiv; and.
North American market returns arguably follow a pattern of normal distributions. As a result, financial models can be used to price derivatives and make somewhat accurate economic forecasts about the future of equity prices. Emerging market securities, on the other hand, cannot be valuated using the same type of mean- variance analysis. Also, because emerging markets are undergoing constant changes, it is almost impossible to utilize historical information in order to draw proper correlations between events and returns.
Although most countries claim to enforce strict laws against insider trading , none has proved to be as rigorous as the U. Insider trading and various forms of market manipulation introduce market inefficiencies , whereby equity prices will significantly deviate from their intrinsic value. Such a system can be subject to extreme speculation, and can also be heavily controlled by those holding privileged information.
Emerging markets are generally less liquid than those found in developed economies. This market imperfection results in higher broker fees and an increased level of price uncertainty. Investors who try to sell stocks in an illiquid market face substantial risks that their orders will not be filled at the current price, and the transactions will only go through at an unfavorable level.
Additionally, brokers will charge higher commissions , as they have to make more diligent efforts to find counterparties for trades. Illiquid markets prevent investors from realizing the benefits of fast transactions. A poorly developed banking system will prevent firms from having the access to financing that is required to grow their businesses.
Attained capital will usually be issued at a high required rate of return , increasing the company's weighted average cost of capital WACC. The major concern with having a high WACC is that fewer projects will produce a high enough return to yield a positive net present value.
Therefore, financial systems found in developed nations do not allow companies to undertake a higher variety of profit-generating projects. A solid corporate governance structure within any organization is correlated with positive stock returns. Emerging markets sometimes have weaker corporate governance systems, whereby management, or even the government, has a greater voice in the firm than shareholders.
Furthermore, when countries have restrictions on corporate takeovers , management does not have the same level of incentive to perform in order to maintain job security. While corporate governance in the emerging markets has a long road to go before being considered fully effective by North American standards, many countries are showing improvements in this area in order to gain access to cheaper international financing.
A poor system of checks and balances and weaker accounting audit procedures increase the chance of corporate bankruptcy. Of course, bankruptcy is common in every economy, but such risks are most common outside of the developed world. Within emerging markets, firms can more freely cook the books to give an extended picture of profitability.
Once the corporation is exposed, it experiences a sudden drop in value. Because emerging markets are viewed as being riskier, they have to issue bonds that pay higher interest rates. The increased debt burden further increases borrowing costs and strengthens the potential for bankruptcy. Still, this asset class has left much of its unstable past behind.
Investing in Emerging Market Debt has rewards to offer. Political risk refers to uncertainty regarding adverse government actions and decisions. Developed nations tend to follow a free market discipline of low government intervention, whereas emerging market businesses are often privatized upon demand. Some additional factors that contribute to political risk include the possibility of war, tax increases, loss of subsidy , change of market policy, inability to control inflation and laws regarding resource extraction.
Major political instability can also result in civil war and a shutdown of industry, as workers either refuse or are no longer able to do their jobs. Investing in emerging markets can produce substantial returns to one's portfolio. However, investors must be aware that all high returns must be judged within the risk-and-reward framework.
The challenge for investors is to find ways to cash in on an emerging market's growth while avoiding exposure to its volatility and other drawbacks. The aforementioned risks are some of the most prevalent that must be assessed prior to investing. Unfortunately, however, the premiums associated with these risks can often only be estimated, rather than determined on a concrete basis.
Investing Essentials. International Markets. Trading Strategies. Your Money. One of the most recent and prominent examples of corruption in emerging markets came to light in late Executives at Brazil's state-owned oil company Petrobras PBR were caught in an intricate web of bribes and payments between the company's contractors, executives, and Brazilian politicians. Harmful actions by crooked executives at emerging-markets firms are anything but novel. Russia was rife with these situations in the late s as its economy attempted a transition to a capitalist democracy.
In late , investors discovered that Gazprom, Russia's state-owned natural gas behemoth, had sold off several major natural gas reserves to insiders, including its own executives and their families, at pennies on the dollar. Both of these firms have another distinguishing feature that increases risk. Petrobras and Gazprom are examples of state-owned enterprises: companies that are partially or largely owned by their respective governments.
State ownership is far more prevalent in emerging markets than developed economies. State ownership increases risk because politicians' agendas don't always align with investors' interests. Corporations typically have a narrow objective of maximizing profits for shareholders, while governments' responsibilities include resource security, foreign policy, and social welfare, to name just a few.
Higher wages are likely good for workers and the local economy, but they crimp companies' profits. Energy stocks followed a similar trajectory because the Russian market has a substantial stake in the energy sector. The timing could not have been worse, as the move increased the fund's volatility when oil prices declined in and The risk in this situation wasn't necessarily the precise outcome of a larger stake in the Russian market.
But this demonstrates the power governments have in directing how a state-owned firm spends its profits. While Russia's dividend mandate made its SOEs more attractive from a dividend-yield perspective, it also tied up retained earnings that could have been used to increase a company's value by reinvesting in operations, paying down debt, or expanding through mergers and acquisitions.
Emerging-markets economies are more fickle than their developed-markets counterparts in the United States, Western Europe, and Japan. That contributes to the volatility of their stock markets and can lead to the closure or even collapse of entire markets. Indeed, country membership turns over more frequently in the emerging-markets universe than in the developed-markets universe, leading to higher portfolio turnover. We don't have to go that far back in time to find examples.
Stocks listed in Venezuela and Argentina were removed from the MSCI Emerging Markets Index in and , respectively, when those markets became more difficult to trade. Greek stocks were added in late , after the country's debt crisis led to a downgrade from developed- to emerging-market status.
Many of the countries that churn in and out of the emerging-markets universe are niche markets, so the impact on an index fund's composition will likely be small. However, it also means those stocks are less liquid and more expensive to trade.
Trading emerging-markets stocks in a cost-effective way can be challenging. These markets tend to be less liquid, there are currency issues to consider, there may be transaction taxes, and we have seen instances in which local tumult has forced some to close for extended periods. With regard to the exchange-traded fund structure specifically, markets like mainland China, South Korea, and Brazil among others prohibit in-kind redemptions, a transaction that allows ETF managers to rid their funds of securities with unrealized capital gains without having to make taxable distributions to investors.
This mechanism is the linchpin of ETFs' tax efficiency. ETFs that target stocks in these specific markets must sell shares directly to the market and pass along any capital gains to shareholders, potentially saddling them with an unwanted tax bill.
These factors collectively facilitate the efficient allocation of capital and financial development of a country. The output from the model is fascinating. I learned that Venezuela is terribly constrained, with weak credit markets, no bond markets and a tiny illiquid stock market versus its GDP. By contrast, Taiwan has established bond markets and has many participants in its vibrant equity market, which is larger and more liquid than those found in many developed economies.
Operational efficiency relates to the various transactional costs involved when trading in these markets. These include explicit trading costs, such as commissions, fees and taxes, as well as implicit costs such as bid-ask spreads, market impact costs, market depth and breadth considerations; other measures of market liquidity; restrictions such as on short selling ; clearing and settlement systems; and market integrity.
This risk category involves capital controls generally and the direct legal and indirect practical factors that affect foreign investment. Direct factors include consideration of investor frictions, such as foreign investor registration requirements, currency convertibility and withholding taxes. These kinds of restrictions impose costs on foreign investors and are a deterrent to investing.
Transparency as a risk factor has to do with corporate governance practices within countries. Governance issues include things like minority shareholder rights, disclosure standards, board structure and independence; the existence of large blockholder interests; and analyst coverage. China scores especially poorly on this measure, which contributes to its dead last ranking in corporate transparency.
It includes consideration of the general environment of law and order, minority shareholder rights, creditor rights, dispute resolution mechanisms, and regulatory and supervisory powers. These legal protections, or lack thereof, can protect shareholders or limit their ability to pursue action. Many investors consider political stability to be a primary source of risk when investing. Measurements of political stability might include constraints on policy change and commitments to business and real estate ownership.
Karolyi also considers inputs for civil unrest, violence and corruption. Karolyi shows how global investors allocate, and he observes that his model better describes holdings of non-U. He then goes on to test the model out of sample, in the emerging market swoon of , which sheds some light on which risk areas investors appear to have prioritized at that time.
While this book is probably better geared for the more academically inclined or for institutional investors, the comprehensive risk framework Karolyi presents is well-reasoned and is generally comprehensible to the lay reader. While I was familiar, at least anecdotally, with many of the issues covered in this book, it was fascinating to see a quantitative mind attempt to corral these issues in a coherent way and integrate them into a general framework. And while a big picture is great, the detail is also quite stunning.
Thinking about investing in Slovenia? You may be surprised to see it ranks ahead of Japan and Germany for governance and corporate transparency. Ratings are incorporated, in the form of country risk premiums, into the discount rates used to evaluate investment opportunities. This approach appears to have the formal rigor of financial risk management, but it is actually inadequate. To begin with, such ratings usually fail to account for the fact that the levels of policy risk vary among different investors in a country, some of whom may adapt their business practices to local norms and lobby key policy makers better than others do.
Also, policy-risk exposure is to some extent contingent on the relative importance of the proposed investment to the two parties how easy is it for the firm to walk away, and how badly does the local government want the deal? Finally, country risk ratings are usually retrospective, reflecting past policy outcomes. To assess the correlation with current policy risk, an analyst needs to determine how similar the past and present policy-shaping factors actually are.
Even as purely country-level measures, most political risk scorecards are woefully short on analysis, as an example from Chile and Indonesia clearly shows. In , one risk index ascribed an identical score to those two countries. The measure took no account of the significant institutional differences between them. After he was ousted in a coup, the previously favored companies experienced a backlash as the successor government renegotiated their contracts.
Chile, in contrast, had a democratic multiparty system and possessed a well-respected independent judiciary—a further check against arbitrary policy change. Pressures in Chile to enhance equity and social cohesion culminated in the election of socialist Ricardo Lagos as president. He shifted some discretionary spending toward social programs but also respected the rule of law and existing commercial contracts.
Although these sources provide valuable conventional input, they can require more time and money than such small, subjective, potentially biased snapshots might merit. Moreover, given the availability of multiple real-time indicators and metrics in functional areas such as finance, marketing, and human resources, CEOs and boards of directors increasingly demand similar real-time data on the preferences of key players.
This human intelligence can be effectively and continuously incorporated into enterprise risk-management models and frameworks. To broaden their perspectives, more and more companies are reaching out to nonbusiness organizations that can help them anticipate and preempt consumer concerns about environmental, health, and safety issues.
For example, after a bruising experience over the disposal of its Brent Spar oil-drilling platform in , Royal Dutch Shell now routinely includes Greenpeace in substantive environmental discussions. Some companies also consult professional experts, ranging from well-positioned ex-government officials operating on retainer; to the stringers who write for the Economist Intelligence Unit , Stratfor , and Oxford Analytica ; to global political consultancies, such as Political Risk Services or Eurasia Group.
Although employees, suppliers, and activists may have access to better information, they lack the specialized training that these advisers bring to the table. Of increasing importance is the vast amount of information emanating from third-party sources—primarily the mainstream news media, but also bloggers and other observers—that routinely monitor the policy-making process in various countries.
The large volume and relatively unfocused nature of the material make it hard to synthesize, digest, and act upon effectively, even if a company has substantial resources for this activity. Another tool, called natural language parsing NLP software , facilitates more-refined sentence-level inferences by syntactically distinguishing among subjects, verbs, and objects, thereby identifying the orientation of actions or preferences.
NLP software can also gauge the intensity of sentiment. In Greenpeace activists in Hungary protested against the use of cyanide technology at the Rosia Montana gold mine in Romania. For example, a coalition of local and international activists sharply contested the plan by Canadian mining company Gabriel Resources to develop the Rosia Montana gold mine in Romania. The data show that NGOs were relatively indifferent to the issue until mid, when negative reports increased sharply. Information-extraction software can capture changes in attitudes toward a business venture by syntactically analyzing the content of media reports about it.
Click here for a larger image of the graphic. With data about political actors and their level of interest in hand, managers must then synthesize that information into a model of the policy-making process. The accuracy of this technique clearly varies enormously according to the skill set of the decision maker and the relevance of his or her past experience to the current situation.
To improve the accuracy of such judgments, managers can also involve specialized consultancies that draw upon a more diverse set of experiences from multiple firms and industries in the target country or a comparable one. Sessions may be scheduled regularly or triggered by a shock or event that requires a strategic response. Linkages across actors or clusters of actors can be indicated by either location or connecting lines. Although no formal analytic tools are used, the maps can help guide discussion of action scenarios: What happens if we target actor X?
What if we break the link between X and Y? The insights produced by this approach are, of course, only as good as the information brought into the room and the quality of the team assembled. The most formal tool for modeling the policymaking process is the dynamic expected utility model, which is based on game theory. It assumes that, in each of several time periods, every actor an individual or an organization with a vested interest in an issue has a choice of three possible alternatives: proposing a policy, opposing a proposed policy, or doing nothing.
Each actor chooses the alternative that maximizes his, her, or its expected utility in each period. The combined actions of all the actors result in a likely policy outcome. The sensitivity of the outcome to various assumptions and parameters can then be calculated, helping to identify which actors are so pivotal that a change in their preferences, power, or salience would have a large impact on policy.
A growing number of multinational corporations are also adopting these tools. A large British company, for example, used such a model to decide how to influence the climate change debate in the European Union. Analysts first identified which actors were most commonly cited in the press and whom these actors referenced in their speeches and writings. Although the integration of automated data collection, dynamic expected utility modeling, and influence-map visualizations remains in its infancy, the potential applications are broader than the management of policy risk alone.
Of course, the risks of investment may simply be too great to justify entry into certain political zones. But in many cases investors who explicitly recognize the dynamism of the environment and implement appropriate strategies to address it will find the risks quite manageable. At its heart, this system will always retain elements of tacit knowledge and experience, and not all managers and firms will be able to master its intricacies. But those that do will find it a powerful source of competitive advantage.
You have 1 free article s left this month. You are reading your last free article for this month. Subscribe for unlimited access. Create an account to read 2 more. Emerging markets. The Hidden Risks in Emerging Markets. Henisz and Bennet A. From the Magazine April Political mastery can become a source of competitive advantage and a means of avoiding losses.
A version of this article appeared in the April issue of Harvard Business Review. Read more on Emerging markets or related topics Risk management , International business and Financial service sector. Witold J. Henisz henisz wharton. Bennet A. Zelner bzelner duke. Partner Center.
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