Emerging markets have been a popular investment area since their launch in the early 2000s. Since then, many new funds and tools that invest in emerging markets have been introduced. Emerging markets are a unique investment opportunity because they provide equal risks and rewards. Although there are huge returns waiting for investors to determine the right emerging market investment at the right time, sometimes the risks involved are not well understood.
- Emerging markets have been a popular investment area since their launch in the early 2000s.
- Although there are huge gains waiting for investors to determine the right emerging market investment at the right time, they sometimes underestimate the risks involved.
- The process of entering advanced economies does not always show an upward trend. When a country faces political turbulence or natural disasters that severely (suddenly) hinder its economic growth, enthusiastic investors may pay a lot of price.
- When proceeding with basic caution, the returns from investing in emerging markets may outweigh the risks; the fastest-growing and highest-returning stocks will appear in the fastest-growing economies.
What are emerging markets?
Emerging markets describe an economy that is between the development stage and the developed stage. The emerging market stage occurs when the economy grows the fastest and fluctuates the most.
In 2021, the current emerging market economies include India, Mexico, Russia, Pakistan and Saudi Arabia. When identifying emerging markets, investors and economists are looking for countries with minimal political or social turmoil and sustained economic growth.
Risks of investing in emerging markets
Investing too late in emerging markets 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, when most people realize China’s economic growth, it is already striding forward to become an economic power. At the height of popularity in emerging markets, investment can be very expensive. In addition, the growth of emerging markets is not stable and volatile, so the timing of investment is very important.
The process of entering advanced economies is not always an upward trajectory. The country may face political instability or natural disasters, which may severely (and suddenly) hinder its economic growth. Unfortunately, this can cost enthusiastic investors a lot. For example, Russia has been alternating between emerging markets and developing economies since the 1990s. The consequences of communism and poor currency management caused massive debt defaults, leading to a substantial depreciation of the Russian currency, the ruble. For a while, this country was considered a bad investment. However, Russia has a large amount of oil reserves and mineral resources, and it is likely to develop into a developed country in the near future.
The return on investing in emerging markets
When basically cautious, the rewards of investing in emerging markets may outweigh the risks. Despite volatility, the fastest-growing and highest-returning stocks will appear in the fastest-growing economies. The secret to adding the growth of emerging markets to your portfolio is to limit yourself to reasonable risks. Exchange-traded funds (ETFs) are a good choice because you can add entire countries or multiple countries to your portfolio.
In addition, due to its global nature, many US blue chip stocks provide good exposure in emerging markets. For example, the income mix of Coca-Cola reflects the fact that it is popular in China, Japan, and the United States. The purchase of blue chip stocks or funds that invest in these stocks can increase exposure to emerging markets and balance the stability of developed markets.