The Future Of Emerging Market Investments
Emerging market investments present a compelling prospect for those seeking diversification and growth beyond established economies.
Author:Frazer PughReviewer:Gordon DickersonJan 10, 20241.4K Shares46.9K Views
Emerging market investmentspresent a compelling prospect for those seeking diversification and growth beyond established economies.
These dynamic markets, characterized by rapid development and evolving consumer behaviors, offer unique opportunities and challenges that demand a strategic and informed investment approach.
Understanding the intricacies of these markets is essential for investors seeking diversification and potential returns beyond established economies.
What Is An Emerging Market?
Most people agree that a developing nation is an emerging market if it is rapidly becoming an important player in the international economy.
According to the World Economic Outlook published by the International Monetary Fund (IMF), 39 economies are considered 'advanced.' These economies include the United Kingdom, the United States, Japan, Germany, and France.
The criteria used to determine this classification include a high per capita income, exports of diverse goods and services, and greater integration into the global financial system.
'Emerging market and developing' economies are the remaining brackets that the IMF uses to classify countries worldwide.
Forty more countries, including Turkey, Brazil, China, Indonesia, Mexico, Russia, and South Africa, are included in this category of countries classified as "emerging market and middle-income" economies, according to the International Monetary Fund's Fiscal Monitor. Emerging markets are generally characterized as having:
- Market volatility- Business cycles in emerging countries tend to be more cyclical than in established markets. This is due, in part, to the fact that these economies are highly dependent on commodity exports, which are subject to their own unique cycles. The majority of an emerging economy's exports are basic commodities, according to studies conducted by the St. Louis Federal Reserve.
- Higher growth and investment potential -Many emerging economies have enacted business-friendly laws in an effort to entice foreign investment, and they enjoy a competitive edge as suppliers of raw materials and low-cost products to wealthier nations.
- Stronger economic growth -In an effort to diversify their economies away from commodity exports, the governments of several of these nations are actively promoting industrialization. They have a youthful population in comparison to industrialized nations and spend heavily in education, infrastructure, and technology, which can lead to economic development and prosperity.
Advantages Of Emerging Market Investments
Portfolio diversification and promising growth are two possible advantages of investing in emerging markets, which account for almost 80% of global growth. These nations are varied and at various points in their development, but they all have something to offer in terms of population, innovation, market size, and economic growth.
Unlike in developed markets, emerging market investments can tap into regions' long-term structural growth drivers. They will likely have the world's fastest-growing economies and be the primary drivers of future global growth.
An important advantage of emerging markets is diversification. Investors can access a diverse range of economies in these markets, both in comparison to developed markets and amongst themselves. Given that these nations are home to six billion people—or about 85% of the global population—it is crucial to prioritize sustainable, long-term growth.
Investing in emerging markets doesn't have to be a wild ride because there are plenty of stable, internationally focused, cash-based profitable companies in Asia, Europe, Africa, the Middle East, and Latin America. Mispricings can occur due to the large number of firms listed in emerging market countries, many of which do not have good broker coverage.
Protective investing in emerging markets during times of market volatility is possible due to their lower correlation with more developed markets. This means that emerging markets do not all react in the same way at once.
Risks Of Emerging Market Investments
There is a higher chance of political, economic, and currency instability, among other risks, when investing in developing markets. While exporters can lessen the impact of currency risk, domestic businesses still face it.
With the conflict between Russia and Ukraine having an effect on the area, geopolitics has become an important worry for investors in developing markets. Emerging markets are more likely to have corporate governance risks than developed markets.
Antitrust lawsuits in the United States and windfall taxes on oil producers in the United Kingdom are examples of how political action can affect businesses and nations. Investors are hesitant to put money into China's tech sector after the country's recent crackdown.
Political, currency, and liquidity risks are major considerations, but they also present opportunities for profitable investments. It is critical to time investments properly because investors frequently overreact and overcompensate in response to these perceived risks.
The political, economic, and monetary risks in emerging market investmentmust be carefully considered.
How To Invest In Emerging Markets
Think about these options if you're interested in getting into emerging markets:
American Depositary Receipts (ADRs)
The stock prices of these non-American corporations track the stock prices of these companies in their home markets; they trade on U.S. stock exchanges. Companies like ICICI Bank (IBN), Vale S.A. (VALE), and Taiwan Semiconductor Manufacturing (TSM) are examples of ADRs from emerging markets.
U.S.-listed International Exchange-traded Funds And Mutual Funds
Compared to investors who try to build their own holdings, mutual funds and ETFs can be more diversified since they own multiple firms simultaneously. They can also purchase shares in firms that regular people can't. Locate any exchange-traded funds (ETFs) or mutual funds focused on developing markets in your 401(k) plan.
Which Emerging Markets Should Investors Swerve?
China is a major player in the MSCI emerging markets index and the world's second-largest economy, according to Shard Capital's Mike Hollings. But investors are beginning to doubt the security of investing in China due to the government's crackdown on big tech companies and the worldwide lockdown caused by COVID-19.
The United States has also relocated its production centers out of China, which has had a disappointing re-opening since COVID-19. The disillusionment with China and the low free float have caused India to become an overvalued market, according to Kamil Dimmich of Pacific North of South.
This, in turn, will cause returns to be subpar once growth catches up with valuations. With inflation reaching nearly 40% and the value of the Turkish lira collapsing, Rob Burgeman of RBC Brewin Dolphin is wary of Turkey. South Africa's economy is grinding to a halt as a result of rolling load shedding and crumbling electrical infrastructure.
How Emerging Markets Can Fit In A Portfolio
These assets may be worthwhile to include in a diversified portfolio, even if the risk/return profile of developing markets is greater.
There is often a significant component of growth in emerging markets. Investors should expect larger returns in these assets compared to established markets during times of strong economic development.
According to Pat O'Hare, chief market analyst at research firm Briefing.com, this is comparable to how high-growth US equities frequently excel during US market rallies.
O'Hare claims that investors should allocate a lesser percentage of their portfolio to developing markets compared to the more stable developed markets due to the volatility of the former.
If you want exposure to global markets without the usual EM volatility, a broader-based international fund that also includes established economies like Germany, Japan, and the UK might be a good option.
Emerging Market Success Stories
The democratic transition in South Korea in the late '80s is a major success story in the developing market space. After establishing itself, the nation welcomed a number of multinational corporations, including Korean manufacturers Kia and Hyundai Motor Company and electronics behemoth Samsung Electronics.
Index providers disagree on whether South Korea is still an emerging market due to the country's meteoric rise to prominence. According to FTSE Russell, a developed market, South Korea is an important market.
Vanguard Emerging Markets (VWO), a top ETF in terms of AUM, does not invest in South Korean companies or stocks. On the other hand, South Korean firms are included in other developing market funds and ETFs.
An further example of a successful rising market is China. According to data compiled by the World Bank, China's GDP has grown at a rate of over 10% every year since the country's economic reforms in 1978. Alibaba and Tencent are only two of the many well-known multinational corporations based in the country.
Reasons To Invest In Emerging Markets
Potential For Growth In Emerging Markets Is High
Investing in emerging markets is a risky endeavor, involving volatility, political, economic, and currency risks. Domestic businesses face currency risk, while exporters can mitigate it. Geopolitics, particularly the Russia-Ukraine conflict, is a major concern.
Corporate governance risk is more prevalent in emerging markets than in developed ones. Political actions can impact companies and countries, as seen in US anti-trust litigation and UK oil producer taxation.
The recent tech sector crackdown in China has paused investment. Major risks include political, foreign exchange, and liquidity. However, investors often over-react and overcompensate for these perceived risks, making it crucial to time investments correctly.
Maximum Diversification
Diversifying US shares and investments with developing economies is crucial for gaining exposure to other nations and political contexts. Emerging markets can mitigate foreign exchange conversion effects and benefit from foreign exchange headwinds for the S&P 500.
The FOMC is expected to maintain its rate-hiking agenda in 2023, potentially hiking rates multiple times. A stronger foreign exchange headwind for US corporations has led to a rising dollar index, while developing market central banks are leaning towards a rate decrease, potentially benefiting developing economies.
Eurasian Growth Benefits From China's New Policies
Even though it's a huge market, China is still considered an emerging market, and its growth in 2023 and 2024 will have a major impact on this growth. Over the last two years, the country's market has been showing signs of weakening due to the government's strict market control measures and the 0-COVID policy.
From its 2021 high, the MSCI Emerging Markets Index Tracking ETF (NYSEARCA: EEM) has lost about 30% of its value; yet, relative to the S&P 500, it has gained during the same time period; nonetheless, the relative importance of the two is changing.
China has been adjusting policies to increase demand, restore confidence, and encourage economy; it has also terminated its zero-COVID policy.
Growing Markets Can Maximize Returns Through Dividends
One way that investors may increase their returns is by taking advantage of dividends, which are common in emerging economies. For many, the reward for taking the risk is a larger payout percentage compared to their share price.
Some companies, including Infosys (NYSE: INFY), which is listed on the NYSE, offer above-average returns for comparable reasons. To both India and the rest of the globe, Infosys's outsourcing services bring business opportunities.
With a yearly growth rate of almost a decade, the stock offers a yield of around 2.4%. For the record, experts predict that India's GDP will grow at a rate of 12% per year during the following seven years.
Reversal Sight On The MSCI Index After Bottoming Out
A turnaround appears on the horizon, while the MSCI index is still down from its high. Indicators point to $37.50 as a firm support level for the market.
The stochastic and MACD haven't given a complete reversal signal, but they do support the bottom. If the market manages to break over the crucial resistance level at $42, we could expect to see a prolonged surge.
FAQs About Emerging Market Investments
What Are The Key Factors To Consider Before Making Emerging Market Investments?
Investors should evaluate factors such as political stability, economic indicators, and regulatory environments when considering opportunities in emerging markets.
How Can One Mitigate Risks Associated With Emerging Market Investments?
Diversification, thorough market research, and staying informed about geopolitical events are effective strategies to manage risks in emerging market investments.
Are There Specific Industries Within Emerging Markets That Offer Promising Investment Opportunities?
Exploring sectors such as technology, healthcare, and renewable energy within emerging markets can unveil potential high-growth investment prospects.
What Role Do Currency Fluctuations Play In Emerging Market Investments?
Understanding the impact of currency volatility is crucial, as it can significantly influence the returns and risks associated with investments in emerging markets.
How Does The Current Global Economic Climate Affect The Attractiveness Of Emerging Market Investments?
The interconnected nature of the global economy means that economic trends in developed countries can impact emerging markets; investors should stay informed about global economic conditions when considering emerging market investments.
Quick Recap About Emerging Market Investments
In conclusion, engaging with emerging market investments requires a nuanced understanding of the geopolitical landscape, economic trends, and regulatory environments in these regions.
By embracing the potential for high returns and carefully navigating associated risks, investors can position themselves to capitalize on the promising future of these burgeoning economies.
Jump to
What Is An Emerging Market?
Advantages Of Emerging Market Investments
Risks Of Emerging Market Investments
How To Invest In Emerging Markets
Which Emerging Markets Should Investors Swerve?
How Emerging Markets Can Fit In A Portfolio
Emerging Market Success Stories
Reasons To Invest In Emerging Markets
FAQs About Emerging Market Investments
Quick Recap About Emerging Market Investments
Frazer Pugh
Author
Gordon Dickerson
Reviewer
Latest Articles
Popular Articles