Emerging markets provide strong growth potential and can diversify your portfolio, but it’s essential to be aware of any challenges associated with investing in these developing economies.
Quality market infrastructure varies across nations. Brazil and India lack experienced market intermediaries and effective contract enforcement mechanisms that are characteristic of advanced economies.
Economic Growth
Economic development in developing nations has been essential to their success, with emerging markets accounting for more than 50 percent of global economic expansion despite bearing higher risk than developed market economies.
Investors should carefully consider how they can exploit this potential while also diversifying their international investments. As well as political risks, emerging market countries face economic obstacles like limited labor and raw materials availability, high inflation or deflation rates, an unsound monetary policy and volatile currencies.
Projected investment growth for Emerging Market Developing Economies from 2022-2023 falls below its long-term average, which may be attributable to China’s shift away from investment-led growth, low oil and metal prices causing commodity exporters to experience difficulties, as well as the strong U.S. dollar increasing costs of imported commodities and debt for these economies. Yet past crises demonstrate how policymakers in developing markets can successfully mitigate downside risks to sustain long-term growth – not to mention global synchronized growth that may boost investments into emerging markets over the medium term a considerable boost for emerging market investments over this timeframe.
Political Stability
Political stability is of utmost importance in developing countries. It impacts everything from investment growth and labor markets, such as unionization efforts or capital market developments. A socialist regime like that found in China may prevent independent trade unions from being formed – this can impact wages directly; on the other hand, democratic governments encourage capital market developments.
Countries with stable polities generally enjoy secure financial, judicial and transportation systems that operate reliably. Furthermore, these countries have made strides toward decreasing poverty, infant mortality and communicable diseases – leading them to attract domestic and foreign investment opportunities.
Emerging or frontier markets encompass most of the global economy: roughly 78% or 6.2 billion people as shown in Figure 3. These emerging market countries tend to feature lower valuations and earnings growth compared with their developed market counterparts, as well as being included in multiple benchmark indices which give them added visibility. Furthermore, problems occurring in Vietnam or Chile won’t likely impact oil production in Argentina or interest rates in Saudi Arabia as much.
Financial Stability
Emerging markets are defined by countries with rapidly developing economies, rapid economic growth, openness to global markets and investment, improving social stability and tolerance and developing social media usage. Furthermore, emerging market countries must restore any financial buffers lost during their crisis – raising taxes to support spending where safety nets have been cut, rebuilding external reserves that may have depleted and reinstating regulatory standards that were relaxed during a boom period, among others.
Inflation in Emerging Market Developing Economies is declining, helping ease pressure on central banks to tighten monetary policy. Meanwhile, as the dollar weakens and emerging market commodity exporters may experience an increase in value of their currencies relative to that of the US Dollar; nearshoring trends allow companies located within these emerging markets to move production closer to customers for lower shipping costs and increased competitiveness. You can invest in emerging markets via individual stocks, mutual funds or exchange traded funds (ETFs) that focus on one particular country or region – just remember when selling investments that you will likely be subject to capital gains taxes (unless investing through an IRA account).
Investment Opportunities
Emerging markets attract investors with their promise of high returns, as these economies tend to expand faster than developed ones, providing diversification benefits in your portfolio. Furthermore, emerging markets tend to react differently during global economic events than other parts of the world, potentially providing protection from any sudden financial turmoil elsewhere in the world.
These economies have also seen impressive progress in strengthening macroeconomic policies. Many now employ monetary policy regimes which target inflation while adhering to fiscal rules; over time most have developed physical financial infrastructure such as banks, stock exchanges and unifying currencies.
Investing in emerging market economies depends on your investment goals. Investors looking for broad exposure may wish to purchase shares of multinational companies with significant operations in emerging market economies (Coca-Cola, McDonalds or Procter & Gamble are good examples), while individuals seeking specific country or regional exposure could purchase stocks of companies operating there or an ETF investing locally.