The Financial Times's recurring column "The Short View" ran an article last Thursday on emerging markets, noting the stellar performance of emerging markets as well as some of the smaller "developed" markets.
Indeed the indices of some of these markets have increased dramatically.
There are some other considerations that might be relevant to investors.
Let's drill a bit deeper.
How is the local index constructed and is it dominated by one or a few companies?
In other words is there enough diversification available in that market to deal with idiosyncratic risk? Or does one need investments in other markets? Very key questions for those whose philosophy is informed by the CAPM, the efficient markets theory, etc.
The Dow Jones average is composed of some 30 stocks. United Technologies has the largest share in that index with some 6.5%. By contrast in Norway's OBX, Statoil accounts for a whopping 25.98%, Telenor 10.84%, and DnB Nor 9.64%. Just three shares account for 46.5% of the index.
Another is what is the liquidity of the market? Sometimes even the most inveterate punter wants to cash in his winnings.
If I'm not mistaken daily trading on the Ukrainian Stock Exchange maxes out at US$60 million. Closer to "home" one could look at the monthly reports issued by the Bahrain Stock Exchange and learn that many stocks do not trade. And that trades are often in small amounts. For the month of November, BBK had the largest BD volume of shares traded at just short of BD 11 million (roughly US$29 million) - that was roughly 50% of the entire month's trading.
Other market factors that affect investors are:
- Free float
- Structure of market infrastructure, e.g., does one broker control the market as (at least) used to be the case in one GCC state
- Balance of institutional versus retail investors in the market
- Market practice - is insider trading a national sport?
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