The incidence of investors allotted to developing markets over the last decade has been diverse and, on balance, exposure to the emerging asset class has left a bitter taste in their mouths. Relative to developed markets, the prevailing perception has become that emerging markets are poorly managed from an economic and political stance, that accountancy standards are of drastically subordinate eminence, and that the volatility of the asset class is considerably privileged.

The validity of this pessimistic insight becomes questionable when each of these four issues is reviewed: economic management, political management, accounting standards and volatility of the asset class.

Looking at the issue of mismanagement, instead of analyzing a range of economic data, it is valuable to appraise the evaluation of Standards & Poor’s, the credit rating agency of the asset class. The agency monitors the underlying economic health of each emerging country and the credit rating provides a summary of their conclusions.

Second on the issue of political management, it is helpful to look at the experience of Russia and Korea, where a change of political leadership during the last couple of years has been a

significant improvement. In Russia, Vladimir Putin has consistently shown his vow to pursue restructuring while the South Korean president Kim Dae-Jung has overwhelmed investors with his policy of encouraging banks to cease lending to the corporate sector, thereby forcing much needed capital discipline. The impressive result has been a corporate sector that is in a much better financial silhouette.

Third, on the issue of accounting standards, in recent years the reputation of developed markets has been gravely dented by the Enron fiasco. In the meantime, although not universal, standards have been improving in the emerging asset class. There has been increased adoption of globally recognized accounting standards; more detailed reporting of results, and more open and transparent management. All of these items are important issues to consider when researching to identify investment opportunities.

Fourth, on the issue of volatility, risk could be examined from the standpoint of the volatility of the asset class relative to developed markets. Over the last twelve years, the ratio has ranged between one and two, that is, at the peak; the emerging asset class has been twice as volatile as developed markets. However, since the previous peak in 1998, there has been a steady decline once again toward one. This has been achieved, in part, by developed markets becoming more volatile. The declining volatility reflects the relative improvement in the fundamentals of the asset class and should be sustainable given the expectation that these fundamentals are set to improve further.

In conclusion, although most investors’ perception is still that the emerging asset class should be avoided, the fundamentals do not justify this conclusion. The reality today is quite different; improvements have, and are still, taking place. Therefore, a change of view is justified. With returns from developed markets expected to be harder to come by what they have been in the last decade, the emerging asset class represents a source of added value that should be considered by investors.

<B>Nitish Benimadhu

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