Pension funds are among the most powerful of investors. In the UK pension fund money accounts for two thirds of all institutional finance. But as well as being the most important investors they also tend to be the most cautious - a fact which makes for an uneasy relationship with emerging markets.
British based pension funds typically have between 3 and 4 per cent of their portfolios dedicated to emerging markets. In contrast they will have upwards of 55 per cent invested in UK companies with the rest spread about in property, fixed interest securities and other first world stock markets.
Pension fund managers are acutely aware of the risks inherent investing in stock markets in the less developed world. Latest figures from Micropal, the statisticians, show that while many emerging market indices show handsome gains, there were also some worrying reversals. In the year to the start of September the Brazilian market rose by 97 per cent. India climbed 64 per cent and Thailand by 75 per cent.
However, in the same period China's index recorded 25 per cent falls and in Turkey the market was off by 18 per cent. Daily changes in stock and indices valuations can also be huge.
In Shanghai, one of China's exchanges, swings of 8 or 10 per cent are commonplace.
But pension funds, in common with many more cautious investors, are not only discouraged by sudden and significant movements in the value of underlying investments. The value of local currencies can fluctuate wildly, and easily wipe out any gains or exacerbate losses.
In Hungary, for example, the stock market has appreciated in value by nearly 30 per cent in the last year whereas the currency has depreciated by 10 per cent giving a net gain to foreign investors of only 20 per cent.
In Turkey the market has advanced by 25 per cent since the start of the year in local currency terms. But a currency crisis means that in US dollar terms the market has slumped by 48 per cent.
Political instability is also worrying. Seemingly successful peace talks in the Middle East were making Israel look more attractive in investment terms. But the bomb attack on a busy commuter bus in Tel Aviv earlier this month threw new doubt on the state.
The oil rich state of Venezuela was also gaining a following as its government adopted measures to free up the economy. But now the country's rulers are having second thoughts, sending the rehabilitation of Venezuela, from the western financier's point of view, into reverse.
Security issues represent another major headache for investors. Regulatory environments vary enormously. Accounting standards are often inconsistent, a factor which places a question mark over the reliability of financial …