Emerging Market Equity Risks

Most of the risks bondholders face in emerging market debt pertain to equity investments in those same markets, including but not limited to:

• More fragile economies.
• Weaker legal protections.
• Less stable political and policy frameworks.

It is important to remember that with emerging markets, there can be a wide disparity in their makeup. Therefore, remaining aware of the country at hand is even more important. In the past, there has been a debate that is currently without conclusive evidence as to whether emerging market equities are subject to more significant influence via country or industry risk factors. It is not generally thought that country risks supersede industry risks to some degree.

Emerging market equity investors need to focus on how the value of their ownership claims might be confiscated by the government, corporate insiders, or dominant shareholders.

Question

Which of the following most likely explains the relationship among emerging equity markets?

1. Homogenous.
2. Heterogeneous.
3. Heteroskedastic.

Solution

The correct answer is B.

Heterogeneous means different or varied in characteristics. This means essential factors for any market may not pertain to another.

A is incorrect. Homogenous means that the markets are similar. This is untrue for emerging markets and more pertinent to well-developed markets.

C is incorrect. Heteroskedastic is a statistical term that refers to a significant variance in the error term across vectors.

Asset Allocation: Learning Module 2: Capital Market Expectations – Part 2 Forecasting Asset Class Returns; Los 2 (d) Discuss risks faced by investors in emerging market equity securities