Housekeeping and plumbing: the investability of emerging markets

This paper looks at the investment allocation process employed by portfolio investors in emerging markets. In particular, it examines the first of a two-stage decision process: first, investors create a sub-set of investable countries to be analyzed later in further detail; second, they weigh expected returns versus risk and subsequently allocate their funds. This study hypothesizes that the determination of whether a country is investable or not is influenced by a number of factors, especially related to size, quality of “housekeeping” (macro-policies, political economy, local financial markets, corporate governance, etc.) and efficiency of “plumbing” (legal and regulatory framework, custody, clearing and settlement, taxes, etc.). By interviewing many types of these investors in both the United States and the United Kingdom, we delve into their decision-making processes as well as attempt to uncover the factors they indicate matter most in defining the investable universe. We determine the relative importance of such housekeeping and plumbing factors while highlighting the role of external issues, such as index benchmarking and U.S. foreign policy. We recognize from the outset that the most profound effects on investment flows, or the required minimum expected returns, arise from improvements or deteriorations in macro-policies. However, at the margin, improvements can be made in country policies that will, for a given macro-situation, improve the ability of a country to attract international investment flows. [Copyright &y& Elsevier]