Book Reviews Dyman Associates Publishing Inc: Emerging Markets In An Upside Down World

Jerome Booth, a British economist, investor, and entrepreneur, has written a refreshing book. Emerging
Markets in an Upside Down World: Challenging Perceptions in Asset Allocation and Investment (Wiley,
2014) is not the usual whirlwind trip around the emerging market worldif its Tuesday it must be sub-
Saharan Africa. Rather, Booth looks at some generally accepted notions that both inform and
misinform emerging market investors and tries to set the record straight. The book is, to labor the travel
metaphor, a tour of ideas conducted by a knowledgeable, articulate guide.

Booth challenges the reader, as the title indicates, to turn the world map upside down (and, for good
measure, make it a Peters projectionthat is, an area-accurate map). We no longer see emerging
markets as peripheral. They occupy much of the middle area on the map and account for most of the
land mass. Moreover, as the map doesnt show, they also account for over 85% of human population,
the bulk of industrial production, energy consumption and economic growth, and around half of
recorded economic activity using purchasing power parity. And, contrary to standard perceptions of
the investing world, many emerging markets are now safer from some of the worst loss investment
scenarios than many developed countries.

The goal of the book is to help the reader develop new frameworks for investing, frameworks which
may cope better with structural shifts and risk. The first step, and perhaps the most important, is to
become conscious of starting assumptions that require reevaluation. Booth suggests four areas that
investors may want to reexamine: i) risk, uncertainty and information asymmetry assumptions; ii)
investor psychology and behaviour assumptions; iii) structure, efficiency, equilibrium and market
dynamics; and iv) asset class definitions. Fortunately, these are areas that Booth himself explores in the
book, so the investor has a leg upwhether or not he agrees with all of Booths conclusions.

One of the central themes of the book is risk, and one often neglected component of risk (a dangerous
oversight) is the nature of the investor base. Prior to the ruble crisis in 1998, perhaps a third of the
investor base in emerging market dollar-denominated debt was highly leveraged and speculative. But,
as hedge fund money and other speculative investment left the emerging debt market, a more stable
investor base took their placelong-only Western institutional investors and local institutional
investors. With local liabilities, these *local+ investors do not have the same propensity to flee the
market when risk perception rises. Indeed, since the mid-2000s local bond markets often rally in most of
the larger markets during episodes of risk aversionbecause the dominant movement of funds is by
domestic investors moving from domestic equities to domestic bonds. At the time of writing, Booth
notes, local currency debt, largely locally held, is over 80% (and growing) of all emerging markets debt.

Although Booth focuses on emerging markets, much of his analysis can be extrapolated to other
markets. He explores some key investing principles and defines areas ripe for further research. Investors
as well as students of the financial markets can profit from his thorough work.