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There’s a word for investors who don’t know what they are doing in emerging markets, according to a panel at the Milken Conference in Los Angeles on Monday.
You may have heard this word before. Economist and hedge fund manager Mark Dow famously coined the term “Macro Tourists” to describe investors who left the asset classes they knew to opine on macroeconomics topics.
There’s more to it, though and the panelists – speaking at a talk entitled ‘Global Capital Markets: Deflation or Stabilization?’ – did a great job of explaining exactly what it means, and why tourists make the global economy more volatile.
“Emerging markets have the problem of the tourist,” said panelist Mohamed El-Erian. “There aren’t enough dedicated investors,” and that leads to liquidity issues.
He described this kind of investor as someone who sees an exotic locale in a magazine and decides they want to go there on vacation. The problem is that at one sign of instability they scarper. Say there’s a riot in another part of the country that somehow interrupts this person’s nice cocktail by the pool, well, then it’s time to head to the airport.
El-Erian sees Argentina’s recent $16 billion bond auction as a perfect example of this. You’ll recall that the country has been a pariah of international markets since 2001, when the country defaulted on its debt. It just recently reentered the global economy after a new pro-market government agreed to pay creditors who had taken the country to court for years.
“Argentina did not deserve $16 billion of new capital at the rate they [investors] put it in,” said El-Erian. The country was able to attract crossover investors – tourists.
“But my prediction is that the minute something goes on in Argentine politics” liquidity will dry up, he said.
This speaks to the way tourists look at things – it’s very short term. One feature of this short termism is that instead of looking at emerging market economies in isolation, they simply compare one to the other. For example, Brazil has had a rough year, so Argentina is looking good in comparison.
But that doesn’t necessarily mean Argentina is good.
Part of this is a function of some investors needing to diversify their portfolios across regions and asset classes.
And some of this is just tourists being tourists.