What You Need to Know Before Investing in Emerging Markets…

Emerging Markets

 


Emerging Markets

Are countries in the process of rapid growth and industrialisation.

 

There are 25 countries that are currently considered Emerging Markets.

Global locator of Emerging Markets 2017

 

 

These countries are very diverse; culturally, geographically and economically. This makes it difficult to think about their development as one homogenous block. However, there are certain characteristics that remain constant and allow us to distinguish them from developed countries.

 


Global Investment

Young & Growing Population


Emerging markets stand out as home to a massive 89.8% of the global population under the age of 30 years of age. (Euromonitor 2016)

 

Underdeveloped Infrastructure


Emerging markets are generally in the process of building or upgrading infrastructure, this substatially increases the demand for government and private spending leading to economic growth. However, this might also mean higher costs for businesses in the short-term.

High Levels of Foreign Direct Investment


Emerging economies have generally seen a higher level of foreign direct investment in comparison to most developed economies.

Rapid Growth & Industrialisation


Rapid population growth, high consumption levels and rapid industrialisation, are some of the factors that make most emerging markets grow at a substantially higher rate when compared to developed markets.

 


 

Benefits of Investing in Emerging Markets

 

Benefits of Investing in Emerging Markets

 

High Potential Investment Return


Total Return Index (1 Year – 2017)

 

Total Return Index 2017

While investing in emerging markets carries a higher risk, the potential for rapid economic growth means significantly higher return potential.

Short & Long-Term Growth


Annual GDP Growth (%)

Annual GDP Growth (%) - 2017

 

The biggest advantage of investing in emerging market is the potential for high levels of growth.

Emerging market’s rapid industrialisation process, high population growth that supports consumption, and high levels of government and private spending (both foreign and domestic), are some of the reasons why when investing in emerging markets you are exposed to strong long-term growth.

 

 

Resource Rich


Natural Resources Rents (% Of GDP)

Natural Resources Rents (% Of GDP) - 2017

 

Many emerging markets have a wealth of resources currently in demand globally or will in the future, providing opportunity for future long-term investment growth. Investment opportunities include; traditional carbon energy, hydroelectric, industrial metals, construction, special materials, trees and timber, precious metals, etc.

Big Spenders


Household Final Consumption Expenditure (Annual % Growth)

Household Final Consumption Expenditure (Annual % Growth)

 

 

Emerging Markets show a higher level of household spending when compared with developed economies. Millennials in these economies are seeing their average wages increase, which consequently increases their buying power.

 

Risky, But Less Than You Think


International investments can be a good diversifier for your investment portfolio because economic downturns in one country or region, can be offset by growth in another. If you research the main economic and political indicators for emerging markets and choose a country whose economy is not strongly correlated with other countries in your investment portfolio, then this could reduce your overall investment risk.

Emerging Markets - Risky, But Less Than You Think

 


 

Cons of Investing in Emerging Markets

 

Investor Life

 

 

Political Risk


Political Stability and Absence of Violence Index

Political Stability and Absence of Violence Index - 2017

 

The lack of institutional stability, a higher control of trade and capital movement, and the disrespect of the rule of law creates a potential for corruption and uncertainty. All these factors increase the risk of investing in emerging markets. The level of political risk varies drastically amongst emerging markets therefore research is vital in minimising this risk.

Economic Volatility


Inflation, Consumer Prices (Annual %)

Inflation, Consumer Prices (Annual %)

 

Higher levels of inflation, volatile currencies and high levels of debt are some of the drivers of economic volatility in emerging markets. When investing in foreign countries an investor should analyse the country’s main economic indicators including inflation, unemployment and currency volatility.

 

Currency Risk


When investing in a foreign country there is always the risk of loss from fluctuating foreign exchange rates, however having a well-diversified portfolio with both long-term and short-term investments, can allow you to mitigate most of this currency risk.

 

Currency Risk

 


 

Conclusion

High return and risk always come hand in hand. This is not different when investing in emerging markets, however the right research and diversification strategy can minimise this risk and make potential returns a lot more attractive for your investment.

Your tolerance to investment risk and how your current portfolio is allocated, are the main factors in deciding if emerging markets should be part of your investment plans.

 


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DIVERSIFYING YOUR INVESTMENT PORTFOLIO

IN EMERGING MARKETS


 

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