International investors are slaves to indices. Most of the time, they limit themselves to buying only stocks and bonds that are included in indices put together by index providers such as MSCI and JPMorgan.
This severely narrows their investable universe. According to the Institute of International Finance, only about $2.8tn out of $12.6tn in emerging market bonds and about $7.5tn out of $24.7tn in EM equities are bought or sold by foreign investors. The rest, they simply ignore.
The result is not only a lot of missed opportunities. It means that investors end up exposed to risks they might otherwise avoid. It can also produce sharp movements in asset prices that have little or nothing to do with the assets themselves.
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