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
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 important are emerging markets? ›
The global economy is increasingly influenced by the Group of Twenty's large emerging markets. Over the past two decades, these economies have become much more integrated with global markets and are generating larger economic “spillovers” to the rest of the world.
What are the advantages of investing in an emerging economy? ›
Growth. 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 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.
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.
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%.
Why do we target emerging markets? ›
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.
How do you succeed in emerging markets? ›
How to succeed in emerging markets
- Take a phased approach to understanding the opportunity afforded by new markets. ...
- Step away from the generalisations. ...
- Assessing new markets – 5 key considerations. ...
- Look for leapfrog opportunities. ...
- Remember, e-commerce is not the same everywhere. ...
- Understand the technicalities of new markets.
What is the importance of emerging industry? Emerging industries are crucial for economic growth as they drive innovation, create jobs, and provide new solutions to evolving needs. They often lead to technological advancements and can disrupt established sectors, fostering competition and enhancing consumer choices.
What are the advantages and disadvantages of emerging markets? ›
Emerging markets tend to have more systemic risk than developed markets, yet they can also have rapid growth rates that result in a high return on investments based in those countries.
Potential benefits of investing in emerging markets
Higher return potential over time compared to developed markets. Diversification and relatively reduced overall portfolio volatility. Access to innovative companies not available in developed markets. Have strong GDP growth and demographic trends.
What are the pros and cons of growth investing? ›
The returns on investment in growth stocks are high and the risk of such investment is also quite high. The risk of investment is especially high in short-term investments. Growth stocks fail in rare cases and hence the risk is lowered significantly in the long run.
Is it worth it to invest 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.
Why do investors invest in emerging markets? ›
Emerging markets account for 80% of global growth. Emerging markets may have a competitive advantage as exporters of low-cost and raw goods to richer nations. Exchange-traded funds are one way to get exposure to this region, but look to see what you're buying.
What impacts emerging markets? ›
Risks of Emerging Markets
This risk can include political instability, domestic infrastructure problems, currency volatility, and illiquid equity, as many large companies may still be state-run or private.
Are emerging market bonds a good investment? ›
Consider EM bonds carefully
Among the opportunities in the fixed income markets in 2024, local-currency EM bonds may be one to consider for investors with a higher risk tolerance. The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity.
How much should I put 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.
Is Fidelity emerging markets a good investment? ›
Overall Rating
Morningstar has awarded this fund 4 stars based on its risk-adjusted performance compared to the 716 funds within its Morningstar Category.
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%.
