Emerging markets have remained a popular investment area since their introduction in the early 2000s. Since then, a number of new funds and tools for investing in emerging markets have been introduced. Emerging markets are a unique investment opportunity because they offer equal parts of risk and reward. While there are huge gains awaiting investors that can identify the right emerging market investment at the right time, the risks involved are sometimes not well understood.
Key Takeaways
- Emerging markets have remained a popular investment area since their introduction in the early 2000s.
- While there are huge gains awaiting investors that can identify the right emerging market investment at the right time, the risks involved are sometimes understated.
- The process of emerging into a developed economy isn't always an upward trajectory and when countries face political upheaval or natural disasters that seriously (and suddenly) stymie their economic growth, it can cost enthusiastic investors a lot.
- When basic caution is exercised, the rewards of investing in an emerging market can outweigh the risks; the biggest growth and the highest-returning stocks are going to be found in the fastest-growing economies.
What Are Emerging Markets?
Emerging markets describe economies that exist between the stages of developing and developed. The emerging-market phase occurs when economies see their most rapid growth, as well as their greatest volatility.
In 2021, current emerging market economies include India, Mexico, Russia, Pakistan, and Saudi Arabia. When identifying emerging markets, investors and economists are looking for countries where there is very little political or social unrest and consistent economic growth.
Risks of Investing in Emerging Markets
Investing too late in an emerging market is the biggest risk of this type of investment. China is a good example of an economy that was previously considered an emerging market. However, by the time that the majority of people became aware of the growth of the Chinese economy, it was already well on its way to becoming an economic powerhouse. At the height of an emerging market's popularity, investing can be very costly. In addition, the growth of emerging markets isn't steady and they can be very volatile, so the timing of an investment is very important.
The process of emerging into a developed economy isn't always an upward trajectory. Countries can face political upheaval or natural disasters that can seriously (and suddenly) stymie their economic growth. Unfortunately, this can cost enthusiastic investors a lot. For example, Russia has alternated between an emerging market and a developing economy since the 1990s. The aftermath of communism and poor monetary management created a massive debt default, massively devaluing Russia's currency, the ruble. For a time, the country was considered a poor investment. However, Russia has access to large amounts of oil reserves and mineral deposits, making it very likely that it will evolve into a developed country in the near future.
Rewards of Investing in Emerging Markets
When basic caution is exercised, the rewards of investing in an emerging market can outweigh the risks. Despite their volatility, the most growth and the highest-returning stocks are going to be found in the fastest-growing economies. The secret to adding growth from emerging markets to your portfolio is to limit yourself to reasonable risks. Exchange-traded funds (ETFs) are a great option because you can add an entire country or a combination of countries to your portfolio.
In addition, many U.S. blue-chip stocks offer decent exposure to emerging markets because of their global nature. For example, the revenue mix of Coca-Cola reflects the fact that it is popular in both China, Japan, the U.S. Buying blue-chip stocks or funds that invest in these stocks can add emerging market exposure with a balance of developed market stability.
FAQs
Emerging market investments can provide diversification and potentially rapid growth to a portfolio, but they can also be risky. GLIN and INCO are among the best-performing emerging market ETFs this year. You may also be able to buy individual emerging market stocks, although this may not be right for every investor.
Why can investing in emerging economies be beneficial responses? ›
The biggest advantage of emerging market investments is the potential for high growth. Diversification. International investments can be a good diversifier for your investment portfolio because economic downturns in one country or region, including the U.S., can be offset by growth in another.
What are the advantages of emerging markets? ›
It can have increased liquidity in local debt and equity markets, increased trade volume, and foreign direct investment. It can develop modern financial and regulatory institutions. Some notable emerging market economies include India, Mexico, Russia, Iran, Saudi Arabia, China, and Brazil.
How risky are emerging markets? ›
Emerging markets are generally less liquid than those found in developed economies. This market imperfection results in higher broker fees and an increased level of price uncertainty.
Is it ethical to invest in emerging markets? ›
Although labour is cheap in emerging economies and consumer markets are growing, environmental and other ethical practices leave much to be desired. When things go wrong this can result in potentially serious reputational, commercial, legal and financial impacts on businesses.
How do emerging markets affect the economy? ›
High rates of economic growth
Governments of emerging markets tend to implement policies that favor industrialization and rapid economic growth. Such policies lead to lower unemployment, higher disposable income per capita, higher investments, and better infrastructure.
Do emerging markets do well in recession? ›
A declining dollar
If a US recession is on the way would only make more of a case for greater diversification in global portfolios – a positive for emerging markets. A recession would entail lower inflation and, as a result, lower US interest rates.
Should you overweight emerging markets? ›
In more conservative diversified model portfolios, we recommend lower allocations to higher volatility, growth-oriented, strategies such as emerging market equities.
Why is it good to invest in developing countries? ›
The right investments can improve infrastructure, provide access to essential services, increase amenities and boost overall human development. These investments positively impact health, education and economic opportunities.
Which of the following is a benefit of investing in emerging markets? ›
Following are the key potential benefits of investing in emerging market opportunities through mutual funds. Higher return potential over time compared to developed markets. Diversification and relatively reduced overall portfolio volatility.
Explore the top 5 emerging markets: China, Indonesia, Vietnam, India, and Georgia. Learn about their growth potential, market entry considerations, and the importance of localization for your brand's success. Discover higher growth rates and new opportunities in these regions.
Do emerging markets outperform long term? ›
Contrary to recent experience, over the last 25 years, emerging market equity returns have generally outpaced their developed market peers. Since the end of 1998, the S&P 500 has delivered a 7.55% annualized total return, just behind emerging markets at 7.83%.
What is the case against investing in emerging markets? ›
Investing in EMs, however, comes with higher risks, including currency volatility, political uncertainty and sovereign default, necessitating extensive research and active management. Yet, the global macroeconomic environment plays a crucial role in shaping investment prospects in emerging markets.
What is the biggest challenge in the emerging market? ›
However, investing in emerging markets also comes with its own set of challenges: Political and Regulatory Risks: Emerging markets can be subject to political instability, regulatory changes, and corruption, which can impact investment performance and create uncertainty.
Are emerging market bonds a good investment? ›
Advantages. Despite these risks, emerging market bonds offer numerous potential rewards. Perhaps most significantly, they provide portfolio diversity, because their returns are not closely correlated to traditional asset classes.
How much should I have in emerging markets? ›
In short, a review of the three standard approaches to EM allocation suggest global equity investors should allocate somewhere in the range of 13% to 39% to EM. Source: FactSet, MSCI, MSIM calculations.
What sectors will outperform in 2024? ›
In 2024, that means communication services, information technology and financials, as the best performers, are on their way to good things for the remaining 10 months. Meanwhile, the tail-end trio that will keep on with their losing ways are materials, utilities and real estate.
