Managing Risk in Emerging Markets - Cynthia Steer of BNY Mellon

2/16/2012 8:17:00 AM

Emerging markets investing was once known for uncharted risks, but recent “blow-ups” among euro nations and improved governance among developing countries have upended that maxim. Cynthia Steer, head of Manager Research and Investment Solutions at BNY Mellon Investment Management, told students at Johnson at Cornell University that understanding history, culture, consumer demand and tracking where the middle class is headed are important to successfully invest in emerging markets.


In her presentation titled, “The Way Forward – How Events in Developed Nations Will Impact Emerging and Frontier Markets”, Steer indicated that emerging markets have taken steps in improving governance after the Asian financial crisis in the late 1990s. Because these markets did not wish to be beholden to the World Bank and International Money Funds, they set about building up foreign currency reserves and transformed fiscal and monetary policies.

Cynthia Steer

Steer noted that 2004-05 represented a turning point for many investors and their view of emerging markets after the financial crisis of the late 1990s. This period signaled the beginning of the current era, where emerging markets now have cash and developed nations are struggling with high debt burdens.

But funds from institutional investors have bid up prices in emerging markets. This is rather a time to liquidate the
investment and reap the profits, she added.

Investors should be looking beyond the BRIC nations (Brazil, Russia, India and China) for investment opportunities in
emerging markets and noted that Latin America is receiving too little capital, Steer said. India, China and Brazil are over-priced. She remains “doubly cautious” about Russia, given its high level of corruption and lack of private property rights.

Brazil took measures to avoid boom and bust cycles and has issued long-term bonds with yields indexed to reduce risks from inflation, a historic problem, she said. India’s firms found that the candor of using one set of legal books rather than multiple varieties of accounting books has encouraged investors. Meanwhile, Nigeria’s lack of property rights and propensity for corruption has restricted its growth and interest from global investors.

Cynthia Steer

Steer suggested that emerging markets investors should consider the following:
  • Governance in investment markets is the most important criterion for investing, since it sets a foundation of trust and
  • liquidity.
  • Read history and understand historical trading relationships and commodities.
  • Understand local culture, including consumer demand.
  • Know which questions to ask and not to ask.
  • Build relationships and talk to people who live in your market to understand where the middle class is headed. Observe how children are clothed and what kind of cars are on the road.
  • Traditional valuation models are not easily interpreted, making investing more of an art than a science. The Capital Asset Pricing model, a method of measuring risk-to-return, does not work in emerging markets.
  • Focus on equity investment in smaller companies, since it is easier to assess and monitor the risk. Bain and McKinsey
  • reports can provide a macroeconomic perspective about a nation’s economy and risk factors, but your own fundamental research should determine whether or not an investment makes sense. Local entrepreneurs should be hired to manage the business.

Steer closed with investment advice she received very early in her career regarding risk and reward: “If you make too much money in investing, you are speculating. If you lose too much money, you are incompetent. If you break even, we do not need you.”

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