Here’s an interesting question… where are “Emerging Markets” emerging from and into what?
But before we answer that, what are they? “Emerging Markets” refers to countries in the world which have a less developed infrastructure. They tend to be those that are achieving economic growth, but are not as mature as the developed world.
Emerging Market Groupings
To illustrate this it is worth pointing out how Emerging Markets are often grouped together for investment purposes. While it is always possible to invest in an individual country if you know what you are doing, it is more common to group them.
For example:
The “BRIC” countries include Brazil, Russia, India and China
“Asia Pacific excluding Japan” means South East Asian countries like Indonesia, Singapore, China, South Korea, and so on
“Emerging Europe” includes Russia and emerging Baltic countries like Ukraine, Latvia, Romania
Growth and Risk
Recent investment performance in Emerging Markets has been better in many cases than in the developed world. However, these markets are politically and economically more volatile than their developed counterparts, and so investments are subject to higher levels of risk.
The opportunity for growth comes from aspects like the greater investment in infrastructure (roads, water supply, etc.), availability of land and natural resources, and a growing “consumer society” wanting to improve their standards of living.
The risks come from things like bureaucracy which – along with corruption in some cases – hinders smooth development. Human rights records can act as a drag on development, while political instability and international friction can also dissuade investors. Economic experience in managing aspects like inflation is also less developed, although it could be said that banking systems are more stable than in the “developed” world since they have not developed the convoluted products and procedures which caused the credit crisis in 2008!
All in all, Emerging Markets are increasingly significant for investors, and there are plenty of opportunities to invest when appropriate, both in equities of various types, and in bonds (fixed interest issues by governments and companies).
So Should I Invest?
The answer will depend on your objectives, your attitude to risk, and on the balance of your portfolio.
If you are looking for income, then Emerging Markets is unlikely to be the best place to find it. While a high proportion of companies remain in the early stages of their development they need their capital for growth and have not established the stability necessary to pay a regular dividend.
But for growth investors it’s another story. There is much more potential for growth than in the developed world, as I mentioned. But there’s no doubt it may be a rougher ride getting it. Levels of volatility are undoubtedly higher – but by selecting a well-managed fund or an appropriate index to track, the risk associated with individual companies or countries can be spread.
As with any investment, time is what counts, but particularly so with Emerging Markets. If you:
Are willing to invest for the long term
Are willing and able to wait for periods of under-performance to pass
Are looking for growth but don’t mind seeing some short term losses
Already have other investments providing diversification
…then Emerging Markets could be for you.
About the Author
Peter Lawrence is an Independent Financial Adviser with Prime Time Financial based in Fleet, Hampshire. He specialises in advising over-50s on all aspects of finances including retirement planning, investments, equity release, and estate planning (Inheritance Tax). Keep your finances in good shape – sign up for our email newsletter at http://www.primetimefinancial.co.uk.
Prime Time Financial is a trading style of Keystone Financial Ltd which is authorised and regulated by the Financial Services Authority.