Local investors in local currency emerging and frontier equities are not, in general, as fixated on FX rate and convertibility risk as foreigners.
Dividend yield and earnings yield, both relative to local currency government bond yield, capture the potential returns on offer to local investors.
We screen EM and FM on these metrics, as illustrated below.
This data – "EM Equity Returns for Locals" – is updated on a monthly basis for subscribers to Tellimer Insights Data.
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FX risks not incorporated into these metrics
Apart from potentially signaling where local liquidity in equities may be well supported or where locals might drive a re-rating in cheap markets abandoned by foreign investors, these metrics are less directly useful for foreign funds.
The FX dimension, which is not incorporated into these metrics, is a much bigger part of the investment debate for foreigners.
All of them would wish to avoid a repeat of the scarring experience of trying liquidate and repatriate positions "trapped" by restrictive FX regimes, marking to market these positions, or, worst of all, in the event of coincident redemptions at the fund level, having to liquidate difficult-to-establish positions in stocks, where accessible free float is low, in other countries.
Over the last decade, Russia in large EM as well as Argentina local listings, Nigeria, Sri Lanka, Turkey, and Zimbabwe in small EM and FM all come to mind.