The Investment Opportunity in Emerging Markets
Emerging markets may offer investors greater returns when approached with an investment horizon of at least five years, often boasting natural resource wealth and expanding consumer markets.
Early investments can be costly, as investing too early may exacerbate potential market fluctuations and disrupt the expected progression. The process of becoming an emerging market economy isn’t linear either.
1. Diversification
Emerging markets provide a host of diverse investment opportunities that make them an excellent way to diversify your portfolio. If you want to protect against future COVID-19 pandemic impacts, investing in digital streaming companies (which could benefit from more shutdowns) would provide one way while investing in airlines could exacerbate them negatively.
Emerging market companies tend to possess greater potential for growth than their developed market counterparts, as evidenced by increasing demand in their local markets and faster economic output growth.
Emerging markets present unique investment challenges. Their less-developed financial markets, political unrest, and higher levels of volatility make for challenging investing experiences; additionally their currencies value may fluctuate against the U.S. dollar which could reduce gains. To reduce risk it is essential to carefully examine an emerging market opportunity before making your decision; investors can consider both broad emerging market ETFs as well as country or sector specific ETFs to reduce their exposure.
2. Undervalued Assets
As a whole, emerging markets tend to experience faster economic growth than their wealthier counterparts – leading them to produce superior stock returns. Since 2000, for instance, the MSCI Emerging Markets Index has generated annualized returns of close to 10% versus just over 5% for the S&P 500 index.
But some of these countries face hurdles that impede growth. Venezuela, once one of the richest economies, has fallen back into poverty as a result of poor governance and mismanagement, while Russia, with vast natural resource and oil reserves at its disposal, has taken steps backward on its economic development path due to social tensions and price pressures on commodity markets.
As these headwinds continue, many experts believe EM assets have become undervalued, which could help restore investor confidence and direct funds into this sector. But prior to investing your capital, be cautious and conduct extensive research. Quilter Cheviot’s Carly Moorhouse notes currency volatility as one of the key risks.
3. High Growth Potential
Emerging markets have attracted investors looking for high growth potential in their portfolios. These countries play a vital role in global trade and production while boasting expanding populations with increasing populations providing potential investment opportunities for investors.
Investment success requires finding companies with proven, sustainable growth that can outstrip rising inflation, interest rate fluctuations and debt defaults. Becoming invested in one such company takes patience and long-term vision; emerging market economies may take decades to realize their full potential.
Taiwan Semiconductor Manufacturing stands out as an outstanding emerging market opportunity with a $421 billion market cap and is a critical player in global digital supply chains. As this technology giant grows faster than many US counterparts, investors enjoy attractive returns and growth potential. Other opportunities in emerging markets can be found within renewable energy, transportation, industry and e-commerce based companies that focus on sustainability initiatives.
4. Higher Risk
Emerging markets represent an excellent diversifier for any portfolio, helping offset economic downturns in one country or region with growth elsewhere and giving investors greater returns.
Emerging markets don’t fit a specific definition; most economists agree they refer to countries experiencing fast economic growth. There are various indices which utilize GDP and per capita income formulas in order to identify emerging markets.
Emerging markets investments come with many risks. These can include political and economic instability, insufficient labor and raw materials, unpredictable government policies, high inflation/deflation/volatility/liquidity concerns and regulatory barriers. Juliet Schooling Latter of FundCalibre highlights currency as one of the greatest risks. “When investing in emerging markets, not only must you consider stockmarket risk for that country but also currency risk”, according to Latter.
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