Wednesday, September 1, 2010

Coincidences? Mexico now safer, or is this an illustration of the huge risk?

Yesterday we brought you a story about risk, one in which we elaborated on an article in The Economist. On the Travel Page. So from travel to safety to 'risk'. Coincidentally - assuming The Economist has nothing to do with the important arrest yesterday by the Mexican police! LOL - Edgar Valdez Villareal, an important person in the ranks of the Mexican drug maffia was arrested on the same day on which we published our contribution.

Edgar 'Barbie' Valdez Villareal
Caught by Mexican Police yesterday

The issue is now: how will people interpret this? Our opinion: when it is about something like this happening near by in a country or city that we know, we tend to think that it confirms our belief that the world is getting a safer place. However, when it is about a country that we are less certain about, people tend to see the existence of this guy and his arrest as an indication of how risky a place it was.

The fascinating dual treatment of risk-related information (nearby versus further away) is what plays and will continue to play a large role in analysis of Emerging Markets, when trying to capture the perspective of Western investors.

It is therefore not unlikely that investors from those countries (e.g. a lot of our readers / fans of the LMG Facebook page) will continue to hold an insider advantage when it comes to investing in Emerging and Frontier Markets. Western investors will often continue to ask for confirmations and safety signals that translate into inflated prices for - for instance - large blue chip stocks of Emerging Countries that have developed a bit further and are therefore safer.

In the older days the relative money at the disposal of Westerners was so much larger than that of local investors that there was no choice: join their thinking or be beaten. However, the balance of power has shifted. Today, if anything, the amount of investment money available in Emerging Markets is growing much quicker than that available for investments in these nations in Western countries.

This is changing the name of the game, with investments in smaller caps and frontier countries now really becoming something worthwhile to consider.

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