Investors who are new to emerging stock markets, along with many professionals who specialise in them, often wonder why they trade most of the time at a valuation discount to markets in mature economies whose long-term growth prospects are far less impressive.
The reason was made stunningly clear last month when Dubai sought a moratorium on debt repayments, raising the spectre of default on about US$60 billion (Dh220.4bn) of loans that financed the emirate’s building boom. The future belongs to the developing world – if only it can make it through the present in one piece.
The possibility that tomorrow will never come, or that conditions will be fundamentally less profitable when it arrives, compels investors to demand compensation for taking on that risk. The compensation comes in the form of cheaper valuations.
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