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
And every year, more of them succeed. In investing parlance, these developing countries are called emerging markets. Investing in emerging markets isn't just good for the conscience — it can also be a potentially profitable way to diversify your investment portfolio.
How much should be invested 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. Data as of December 31, 2020. Source: FactSet, MSCI, Global Financial Data, MSIM calculations.
Why do investors invest in emerging markets? ›
Emerging market equities offer exposure to fast-growing economies and key drivers of global growth. Many companies in developing markets are relatively inexpensive compared to their developed market peers.
What are the problems with investing in emerging markets? ›
Because emerging markets are viewed as being riskier, they have to issue bonds that pay higher interest rates. The increased debt burden further increases borrowing costs and strengthens the potential for bankruptcy. Still, this asset class has left much of its unstable past behind.
Are emerging market bonds a good investment? ›
However, emerging-market (EM) local-currency bonds typically are more volatile and carry higher risks than developed market bonds. Navigating the market can be challenging, and many investors may prefer to use funds or other professional management strategies when investing.
What are the benefits of trading with emerging markets? ›
There are two main benefits of trading within emerging markets: diversification and return potential. Individual emerging markets and developed markets may not always move in the same direction, as some emerging economies may be unaffected by what is occurring in developed economies.
Should I invest in emerging markets in 2024? ›
Constructive outlook, despite loaded election calendar and geopolitical risks. Emerging markets' growth is expected to remain steady in 2024 at around 4%.
Do emerging markets do well in recession? ›
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.
What is the 70% rule investing? ›
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.
Is now the time to buy emerging markets? ›
In general, investors are underweight in their emerging market (EM) allocations, and we feel this is an excellent time for a reassessment of that positioning, as the asset class looks poised for potential outperformance in 2024.
Emerging markets are often attractive to foreign investors due to the high return on investment they can provide. In the transition from being an agriculture-based economy to a developed economy, countries often require a large influx of capital from foreign sources due to a shortage of domestic capital.
Why emerging markets are better than developed markets? ›
Emerging markets often offer unique investment opportunities that are not available in developed markets. These can include sectors or industries that are rapidly growing due to the country's specific stage of economic development.
Is it worth investing in emerging markets? ›
They can be attractive to investors due to their rapid growth prospects, but they can be volatile and, therefore, risky. An ideal emerging market benefits from consistent growth but does not struggle with political or social unrest. This can be tricky to predict.
How much to invest in emerging markets? ›
The median emerging-markets weightings for funds geared toward investors retiring between 2045 and 2050 is 6% of equity; emerging markets consume 5% of the median 2026-30 fund as well as the median 2000-10 offering.
What is the best way to invest in emerging markets? ›
Investing in individual emerging markets stocks is difficult for the average investor, so mutual funds and ETFs are often the most effective way to do it. Look for funds with high assets under management.
What is the average return of the emerging markets? ›
Average returns
| Period | Average annualised return | Total return |
|---|
| Last year | 14.7% | 14.7% |
| Last 5 years | 4.1% | 22.1% |
| Last 10 years | 6.3% | 84.7% |
| Last 20 years | 8.1% | 377.3% |
Cambodia Tops the List
| Country | GDP Growth | Growth in FDI Projects (CAGR '21-'23) |
|---|
| Cambodia | 6.1% | 110% |
| Philippines | 5.9% | 51% |
| Kenya | 5.3% | 50% |
| Iraq | 2.9% | 95% |
6 more rowsApr 2, 2024
