Active managers willing to expend resources on research can find value in frontier emerging markets, according to a report from Watson Wyatt.
According to the report, "Emerging Wealth", the differing accounting standards and patchy analyst coverage had so far resulted in limited transparency in the frontier emerging markets. However, this can be mitigated with effective research.
"The lack of quality data would appear to impact the effectiveness of quantitative investment strategies, but equally can provide benefits to fundamentally-driven managers that can expend resources on research to exploit inefficiencies and mitigate exposure to potential fraud," the report said.
Stockholm-based asset manager East Capital said investing in eastern Europe could be a good way for institutional investors to diversify risk across a number of emerging markets and get cheap access to the asset class in the process.
East Capital partner Karine Hirn said early indicators suggested the region had started to recover and eastern Europe could grow faster than developed economies as it did not suffer from structural debt problems.
"Australian investors have been looking to China rather than other emerging markets," Hirn said.
In its report, Watson Wyatt recommended the use of active management in the asset class.
Hirn said that was particularly important to East Capital.
"We are long-only, but are active stock pickers who can take views," she said.
Despite the possibilities of the frontier emerging markets, the report found that on a gross domestic product basis the emerging world was dominated by the BRIC economies (Brazil, Russia, India and China), with China and India in particular showing growth rates in excess of developed countries.
"We believe that emerging markets economies will continue to grow strongly, due to a mix of rising productivity, economic and financial reforms, and favourable demographics," Watson Wyatt said.
