"The rich are different from us," F Scott Fitzgerald once reportedly told Ernest Hemingway midway through a car journey to Lyon. "Yes," replied Hemingway, "they've got more money."
There's a (tenuously) similar line of thinking in investor assumptions about emerging markets. It goes like this: they're like us - developed markets - only with stronger GDP growth.
The problem is, they aren't. Take China as an example. Alison Graham, CIO of Voltan Capital Management and a self-confessed geopolitics wonk, did at this week's TradeTech conference in London and her conclusions were none too optimistic. Besieged by divergent and potentially conflicting interests, the Chinese government makes economic decisions with more than half an eye on the political. "The underlying philosophy is that the purpose of capital is to promote the national interest rather than wealth accumulation for individuals," she said. The same goes for other, geographically diverse growth markets, including Russia and Saudi Arabia.
Francis Fukuyama, the 'end of history' professor, pointed to something similar last year when he accused US policy-makers of taking democracy as the default and then expressing surprise when post-conflict populations failed to adopt it with full-throated enthusiasm.
If urbanising middle-class populations are still consuming, does it make much difference whether they buy Adam Smith's reciprocity of the self-interested? Well, it does if the macro underpinnings are beginning to look shaky. Even leaving aside struggling export markets, cheap capital is no longer quite as cheap. No-one knows for sure the percentage of overall lending in the Chinese market accounted for by non-performing loans, but the most sceptical estimates put it as high as 40%.
The problem for China's senior politicians is there's not much they can do about it. Stuck in an implicit bargain with the populace that trades rising living standards for political quiescence, the government will struggle to keep its end of the bargain if it writes down bad debt. If it doesn't, the government faces a lost decade of 1-2% growth - and the risk of its own removal.
In other words, the problem with markets, especially emerging ones, is that politics gets in the way. So there's a limit to the potential for segmentation of emerging and frontier markets according to an implied level of political risk (say, pale pink for the BRICs, scarlet for frontier markets). They're risky, full stop.
Meanwhile, in the Andes
Practically speaking, not all the difficulties associated with trading emerging markets have been removed. As Allianz Global Investors Asia-Pacific trading head Kent Rossiter told The TRADETech Daily (produced by The TRADE) this week, a plethora of brokerage models, multiple bourse operating models (and currencies), and limited English-language skills characterise even some relatively mature Asian markets.
But the barriers are fewer than they were. Even outside regionally dominant Brazil and Mexico, which have both upgraded their platforms in recent years, Latin American markets are ploughing cash into developing their bourses.
In the meantime, there's an irony to the counter-correlation between maturing BRICs making the right noises - think of Russia's merged bourses and promised investor protection laws - and the fact that at least some of them will lose out to frontier upstarts. If there's still value to be extracted from emerging markets, it isn't necessarily from the BRICs. According to Alex Fleiss, chairman and CEO, Rebellion Research Partners, China will lose share over the next few years to emerging emerging markets, including Mongolia, with its questionable record on legal protection for foreign investors, and Vietnam.