The sovereign imperative
Understanding sovereign risk is the key to investing in central Europe, where foreign investors have an important role to play, says Ashmore Investment Management’s Jerome Booth
The key to investing in emerging markets in central and eastern Europe, as in other emerging markets, is understanding sovereign risk.
The alternative approaches of taking a predominantly (rather than complementary) sector view or bottom-up view are too often followed by a discovery in a crisis that one is, after all, mainly exposed to sovereign risk.
This is especially true the lower down the credit spectrum one invests, though insofar as more stable central European countries have graduated from this situation, so the investment approach can also change to a more typical developed-market approach.
In those countries where sovereign risk is seen to be the main exposure, fixed income is typically the most effective way to gain this exposure. It is far more liquid than equity, has a more diverse investor base, and has a purer exposure to the sovereign risk without corporate risk complications.