What are Emerging Markets and what makes them an attractive sector to invest in?
1. Why Invest in an Emerging Market Economy?
Emerging markets have attracted a ton of investor attention in recent years. You’ve likely heard India and Brazil referred to as emerging markets. But what exactly defines an emerging market, and what makes them so attractive to invest in?
2. Emerging Markets, Defined
An emerging market is an economy that is just beginning to “emerge” onto the global scene. This is usually because the country has recently begun to undergo economic developments and reforms that are helping to propel its economy forward. Because of this, emerging markets tend to see a higher growth rate, on average, than fully-developed countries.
3. Benefits of Investing in Emerging Markets
There are a couple of reasons why emerging markets are garnering so much investor attention right now. One of the main ones is that emerging markets offer the potential for higher returns than traditional markets.
With indices like the S&P 500 seeing nearly-unprecedented growth over the past decade, how much longer do you think that will continue? It’s like a dog on a leash: the dog may run ahead of its owner for a while, but if the owner changes direction, the dog is going to have to go along with it. On the other hand, emerging markets appear undervalued right now. With a string of recent losses, emerging market indices are trading lower than usual, which could make right now a great time to buy.
Another reason to invest in emerging markets is that their GDP growth has consistently outpaced that of developed countries. That’s what makes them emerging, after all! As these countries contribute an increasing share of the global economic growth, we can expect them to also contribute an increasing share of global investor returns.
3. Risks of Investing in Emerging Markets
Investing in emerging market economies isn’t without risk, of course. While on average and over the long term, emerging markets are likely to deliver higher returns to investors, individual markets over the short term are subject to fluctuations in performance. Because these markets are, by definition, growing and evolving, it can be difficult to predict which markets will deliver strong returns and which ones will lag.
Working with established, licenced investment firms can help to mitigate this risk substantially. Because these types of organisations have access to a team of experts whose job it is to understand these markets far more deeply than the average investor, they are able to responsibly invest individual clients' money into the markets that have the greatest likelihood of returning above-average results.
There’s no doubt about it: investing in emerging markets can be a very lucrative strategy for long-term investors seeking the potential of above-average returns. If you fall into that category, it’s worth considering investing a portion of your portfolio in emerging markets. While doing so is not without risk, the benefits far outweigh the risk when you select a reputable investment company to work with. From that perspective, it may even be riskier not to invest in emerging markets, since you could be passing up on significant investment gains!
This website contains general information only and is not intended to provide any person with financial advice. It does not take into account any person's (or class of persons) investment objectives, financial situation or particular needs, and should not be used as the basis for making investments.