Growth potential and long-term outlook for emerging markets remains structurally intact despite cyclically declining exports and capital outflows, according to Credit Suisse Research in its latest edition of Global Investor. Looking forward to an eventual recovery from the current crisis, the domestic-led growth in emerging markets is set to succeed debt-fuelled US private consumption as the most important driver of global economic growth over coming years, it said. The Global Investor is a research-based journal discussing and advising on macro economic and long-term investment trends. “The initial direct shock from impaired capital positions of banks on credit availability has generally been lower in emerging markets and external debt levels have declined in recent years. Nevertheless, capital flight in a global deleveraging process has put emerging markets under pressure. Despite cyclical difficulties, the long-term fundamental catch-up process and growth drivers for emerging markets remain structurally in place. Given their substantial long-term growth potential, we expect capital to flow back,” Credit Suisse said. “Supported by fundamental advantages, including demographics, emerging markets are expected to outperform industrialized countries in three categories essential for economic growth. These include employment, using more capital and boosting productivity,” the bank added. Private consumption growth is expected to be stronger than in developed markets, as several hundred million people obtain the means to demand more than basic necessities. In addition, there is still an obvious need for infrastructure development in many emerging markets. Going forward, commodity prices should ultimately be supported by a structural uptrend in global demand, thus stimulating commodity exporter economies. “Despite cyclical headwinds, the multipolar world theme is still intact,” the bank said in the report. Credit Suisse' Global Investor said that building robust investment strategies and managing the risk of these is more important than ever. It also launched its Business Cycle Clock giving fundamental insights into how asset classes and investment styles perform across economic cycles and introduced a framework for style investing which was built using the HOLT framework. The credit crisis has created great uncertainty for investors around the globe. The value of many assets has decreased in the wake of market volatility and the global recession arising from the crisis. Against this backdrop, it is more important than ever to build robust investment strategies and focus on risk management, it said. Asset allocation is responsible for a large portion of portfolio performance. While the relationship between risk/return and diversification across asset classes are the two core building blocks of successful portfolio construction, investors also need to be aware of limitations of these and react accordingly. Continuous risk management is seen as an integral part of implementing any investment strategy. One useful approach is scenario analysis to gauge how an investment strategy or a portfolio would perform in extreme events, according to Giles Keating, Credit Suisse's head of Global Research. Because portfolio analysis is a labor-intensive process for both professional advisors and investors, customized analysis is mostly appropriate for large portfolios. For smaller portfolios, it generally makes sense to choose standard portfolio templates that have been constructed using the core building blocks of portfolio theory and which are adapted to the different risk profiles of each individual investor. Most risk management tools and metrics work on the assumption of normal market conditions and probability distributions. In his article “Risk Management in Times of Crisis”, professor Thorsten Hens, from the Swiss Banking Institute, University of Zurich, discussed the latest behavioral finance research and argues that a risk management regime that factors in market psychology using even simple indicators and following straightforward rules can help to protect investors against the full effect of a market collapse. __
