Emerging markets are nations moving from traditional pre-industrial economies toward industrialization. Typically, they feature unified currencies, stock markets, financial backing systems and an increasing standard of living.
The exact definition of an emerging market varies depending on who you ask. But generally, these countries are transitioning from closed to open markets while increasing their citizens’ per-capita incomes. Typically, they also build or promote:
If you want to invest in emerging markets, look toward developing nations like China, India and Brazil.
But note that these changes don’t come without a cost – nor do they happen overnight.
1. Low incomes
Emerging markets have lower-than-average per-capita incomes, providing incentive for leaders to:
2. Rapid growth
Countries in emerging markets progress economically and often experience an increase in gross domestic product (GDP). High growth can increase competition and yields for businesses and investors.
High volatility can occur for several reasons, including:
Any of these factors alone can lead to high volatility—and many emerging markets are prone to more than one.
4. Currency and commodity swings
Because emerging governments don’t have the power to influence price swings, they’re more susceptible to currency risk and commodity swings. Extreme swings often precipitate a bear market and/or economic recessions.
5. High potential returns (at high risk)
Economic growth requires a lot of capital, which many foreign investors are happy to provide. However, less-developed infrastructure can make it difficult to make informed trades, sell debt, or otherwise invest in emerging markets. But for investors who do their research, the rewards can be great.
As a foreign investor, international investments and emerging markets provide an outlet for diversifying your portfolio and potentially reaping high returns. However, these returns come with enormous risks, including:
Additionally, not all emerging market investments are safe or worthwhile. Typically, you want to invest in emerging markets that boast little debt, a growing labor force and minimum corruption or social unrest.
These markets are also prone to generating panic and speculation. And even relatively stable markets may take decades to emerge, often pockmarked with periods of stagnation.
Instead of investing in emerging markets on your own, it’s often wise to join a collective (like an ETF or mutual fund). These funds may invest in securities, commodities or debts in developing economies, diversifying risk while offering exposure to emerging markets.
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