If you’re into investing, I’m pretty sure you’ve heard of emerging markets many times. If you’re using a financial advisor, he must have mentioned this to you in the past as well. But have you really look into this sector yourself? When it comes to investing, most of us have heard that diversification in an asset allocated risk-adjusted portfolio is a good thing.
Most of us know that we need to have an understanding of the various asset classes in our portfolio; however, very few of us understand the different categories.
In an effort to help you understand the various classes I will discuss in this post some basic ideas about Emerging Markets.
What are Emerging Markets?
Emerging markets are countries whose economies are progressing toward those of developed countries. More succinctly they are showing signs of having market exchanges, regulatory policies in place, with some liquidity in equity and debt economy.
They are certainly not as developed as the United States, Europe or Japan, but are more developed than what is known as frontier countries or markets.
Although there is disagreement on which countries are which, the International Monetary Fund recognizes 23 countries while Morgan Stanley and Standard and Poor’s has a similar but separate list. We encourage you to go to Emerging Markets List.
However, there are many more countries that you should consider as emerging but most will see as Frontier countries. These center around Africa. Also, keep in mind that this list is not static.
Depending on who is doing the rating, these countries can move on and off the list, with new ones moving on and off the list.
Should You Invest?
The simple answer is if you are an investor and maintain a diversified portfolio, then the answer is yes. The reason is that the upside growth potential is very huge. However, please know that this is a long game, not a short game. It should be part of your portfolio.
These types of markets potentially have very high returns, but again the risk-reward dilemma comes into consideration. They have very high risk. Some of the risks are high political instability. If you’re not afraid of risk and has the guts to take chances, then go for it.
Some of these countries FYI may have infrastructure problems within their borders and come with high currency volatility. As they do not have a mature exchange market, most of the companies are either private or actually run or managed by the government of that country. This creates a very illiquid equity market.
There is some thought that foreign direct investment may tend to not be retracting somewhat partly. This is due to the current US administration’s views on bringing US dollars back into the American economy from overseas.
This capital is needed in these countries so be clear, that US policy does, in fact, affect markets around the world, even emerging countries not so liquid or open markets.
How to Invest in Emerging Markets
There are several ways to invest in Emerging Markets. The easiest, of course, is through Mutual Funds or Exchange Traded Funds that are specifically targeted to emerging markets. Since these markets do not have a clear public exchange you may have to also find other ways to invest. And by investing through these funds the risk involved is I would say lower.
You could also, however, do your research and do a direct investment into them through a crowdfunding application. These would be companies that are in these countries that need capital to grow. Crowdfunding is the process of startup businesses raising capital through hundreds or thousands of investors who each put in a small amount of capital. There are online crowdfunding platforms that also have access to these companies.
One such platform is Emerging Crowd. This site gives you education and opportunities in investing directly into startups with these emerging markets in these countries.
I encourage you to take the time to do your research but certainly make emerging markets as part of your investment portfolio.