Are countries in the process of rapid growth and industrialisation.
There are 25 countries that are currently considered Emerging Markets.
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.
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)
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
High Potential Investment Return
Total Return Index (1 Year – 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 (%)
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.
Natural Resources Rents (% Of GDP)
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.
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.
Cons of Investing in Emerging Markets
Political Stability and Absence of Violence Index
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.
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.
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.
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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