Chapter 6. DEVELOPING PORTFOLIO DRIVERS

Portfolio drivers are the foundation of the top-down method. All subsequent portfolio decisions—country, sector, style, and security—stem from these higher level themes. Thus, accurately identifying current and future drivers is critical to success. In this chapter, we'll teach you to evaluate market conditions, aided by the knowledge and context accumulated in preceding chapters, to develop portfolio drivers for emerging markets. By developing and analyzing portfolio drivers you can better determine the market most likely to outperform or underperform your benchmark (i.e., the broader stock market) and allocate your portfolio appropriately.

THE IMPORTANCE OF PORTFOLIO DRIVERS IN EMERGING MARKETS

Despite some categorical similarities, emerging market countries are a diverse lot. Previous chapters provided a glimpse into these differences, but one only needs to open the newspaper to quickly appreciate the diversity across the category. Political models, economic composition, and social norms vary widely. Not surprisingly, market performance is equally disparate—both country and sector performance vary widely year to year. This underlines the importance of correctly identifying portfolio drivers.

Table 6.1 shows the best- and worst-performing countries in emerging markets and the spread between them each year since 1988. There are two important takeaways from the data. First, the difference between the best- and worst-performing countries tends ...

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