Question

Why do portfolio managers often add securities issued on emerging markets in spite of the high risks associated with these markets?

Answer 1

Portfolio managers pool invests from client and invest in a mix of investments like equity, mutual fund, debt instruments,foreign investment. They act in such a manner so as to suit the long term objectives of their client. Their  investments are   based upon the risk and return appetite of their clients.

Portfolio Managers often add securities issued on emerging markets because the probability of high returns in emerging market is high. The developing country growth is higher than developed countries.The GDP of emerging countries grow at a faster rate over long periods of time.

Moreover they provide advantage of diversification when we add securities from developing countries. The returns from emerging markets are less correlated as compared to returns in US. In case there is recession in US the emerging markets investments can bail out investors as they are less affected by recession.

Investing in emerging markets also provides benefits of gain from currency appreciation. In countries whose currency is becoming stronger as compared to US the investors can gain benefits of US dollar depreciation as compared to foreign currency.

Investing in foreign securities hedge against local risk. These are risks due to political instability, demand slowdown, inflation ,etc in the local country which reduces the real returns in domestic country.