Bill Emmott, former Chief Editor of The Economist and member of the Swiss Re Advisory Panel, on growth opportunities – and risks – for institutional investors.
If there is one idea of the world that currently unites corporate boards and investors, it is that the main forces of growth during the next five, perhaps even ten years will be the emerging markets. While Europe, America and Japan are preoccupied by de-leveraging and dealing with deflation, emerging Asia, Latin America and Africa all have much brighter prospects, with the sole worry being inflation. It all sounds very neat. But we should have two concerns about this conventional wisdom.
The first is the simplest. It is that we should have learned during the dotcom boom of the 1990s and the western credit bubble of 2001 – 2007 that when the investment herd all run in the same direction, hubris and then nemesis can quickly result. After all, it is barely more than a decade since a currency crisis in Thailand triggered off a financial crisis that led to a Russian debt default, the overthrow of the Indonesian dictator, Suharto, and bank collapses all across East Asia.
The second concern is linked to that memory of the 1997 – 1998 crisis. For a board able to take a long-term view, it may well often be the case that business expansion in China, India, Brazil and other emerging markets offers the best prospect of sustained growth, and that failure to establish strong market positions in those countries would itself pose a big risk to the business’s future. This also applies to boards in the insurance sector. But the case for asset managers is quite different.
For asset managers, the real issue surrounding emerging market investments, and indeed commodities, is not growth but correlation and diversification. In 1997 – 1998, emerging market investments turned out to be highly correlated, once the crisis began. The most important question now is whether that is still the case or whether asset classes and the underlying economies have matured sufficiently to permit portfolio diversification and proper risk management.
As economies get larger, as financial systems become more sophisticated, with deeper pools of liquidity and more diverse sources of capital, and as more countries come to share in broad-based economic development, the time will surely come when diversification is possible and correlations decline. But we will not really know whether that time has come until the next crisis occurs. The time to study this issue and to prepare for that crisis is now.
Published 28 March 2011
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