Handbook of Finance: Financial Markets and Instruments

Chapter 13. Emerging Stock Market Investment

LARRY SPEIDELL, CFA

General Partner, Ondine Asset Management, LLC

JARROD W. WILCOX, PhD, CFA

President, Wilcox Investment Inc.

Abstract: The emerging market phenomenon tends to come to our attention most after extremely good or bad returns, but it is a pervasive long-term process of better returns and useful diversification stretching over many decades. It can be understood in terms of innovation diffusion and the several factors that influence it: awareness of, resistance to, and ability to implement new ideas through entrepreneurial activity, combined with increasing transparency, liquidity and low barriers to capital movement that allow globalization of portfolios. There are strong theoretical reasons for expecting relatively high risk-adjusted returns to the fully diversified long-term global investor. Diversification opportunities are best within the frontier markets, both within this group and relative to the developed country investor's home market. Remaining emerging market inefficiencies appear to offer relatively more scope for active management than do large capitalization markets in the United States and other developed markets, but they require old-fashioned attention to detail for their full exploitation.

Keywords: emerging markets, diversification, innovation diffusion, globalization, portfolio construction, demographic, industrialization, population, transparency, corruption, bureaucracy, World Bank, International Finance Corporation ...