Goodbye lazy EM investing
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Goodbye lazy EM investing

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Investors in emerging market assets have been caught short in the past fortnight, with many wrongly positioned for the rising dollar. The sharp fall in EM asset prices has caught many by surprise, but if two weeks of pain has taught them anything, it is that passive investing is not a good idea.

Passive investing in EM has never seemed like the best of ideas to us. But in the last few years, it has worked out for lots of people. Years of easy money from central banks trying to shore up developed world economies have been remarkably good for emerging markets. Bond and equity indices have benefited from a rising tide that has lifted many disparate economies together.

Early this year, few investors were that worried about countries like Argentina and Turkey. They had ridden out many a crisis before. It was clear dollar interest rates were going to rise, but markets had not freaked out yet, so why should they suddenly do so?

Now, the old enemies of a rising dollar and swelling oil price are finally biting, and the macroeconomic environment feels much more volatile.

Nevertheless, the damage is not evenly spread. Countries with high foreign currency debt or that are net energy importers may face severe rises in costs and prices. The punishment meted out so far to Argentina and Turkey, whose currencies have fallen 15% and 13% respectively, gives a taste of how it may feel for the losers.

Meanwhile, oil-rich economies and those with healthier balance sheets could still prosper in 2018.

In such a context, knowing your markets and picking the better ones is vital. Lumping all emerging markets together and saying 'yes' or 'no' to the whole lot, as passive index-driven investors do, is like hearing salmonella has been detected at a restaurant and going out to eat without bothering to find out which one.

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