Emerging markets (EM) are an alluring section of the global equity markets. While access to EM has improved, market inefficiencies persist. Access to reliable company information and data, while improving, still trails the developed world. For information that is available, liquidity and trading limitations can introduce challenges for its exploitation. This contributes to ongoing investment opportunities for skilled active investors. Another dimension which adds to the appeal of emerging markets are the opportunities across different countries and industries, which can vary significantly. Effectively, there are multiple sources of significant return that can be pursued, spanning securities, industries and countries.
However, the capture of this alpha is by no means trivial. Multiple sources of risk exist which can degrade return potential. For individual companies, bankruptcy, fraud, and significant financial loss are events with higher likelihoods in emerging markets. Trading halts and bad data also prove headaches for quantitative oriented investors. Compounding these stock level risks are various macro level issues - currency crises, war or conflict, trade disputes; political elections; oil shocks – all of which can yield dramatic market outcomes.
At QMA, we’ve carefully designed a framework that allows us to capture alpha opportunities across securities, industries and countries, while balancing against adverse risk outcomes.