If you aren’t investing in emerging markets, you’re missing out on huge opportunities. But that doesn’t mean you should just jump in without care.
Investing is, by nature, a bit of a gamble. Unless you’ve managed to get your hands on a time machine (sorry, H.G. Wells’ story doesn’t count, although it is a fascinating read), there is no real way to say exactly what the future may hold. What’s also true, however, is that we can make some pretty darn accurate educated guesses. Will Elvis reappear and host a week-long series of concerts in Las Vegas? We can’t guarantee that it won’t happen, but it is unlikely. You certainly wouldn’t want to bet your 401k on it.
The unknown future can be a little scary, though, especially when it involves your finances. For the most part, however, we are able to put aside that fear when we invest. We have some faith that the overall economy will do well, and that our chosen stocks will thrive for years to come. We know the companies and how they operate. We see them on our store shelves, in our homes, and on television. And we have strategies and plans to make adjustments if things don’t go like we expect them to. There is an element of gambling, yes, but we can make it almost as low risk as we want.
Investing in emerging markets is another story. Whether or not the data supports the idea, many of us feel like emerging markets are high risk. We don’t know the brand names in China or the major agricultural companies in Brazil. Household-name manufacturers in Singapore are unheard of in the U.S. But once you move past the worry, there are a lot of golden opportunities in these markets.
[text_ad]
What are emerging markets?
Emerging markets are economies whose gross domestic product (GDP) is growing at a much faster rate than more developed markets such as the U.S., Germany and Japan. Consequently, the stocks in those countries often grow at a faster clip than the average stock in a more mature market.
Brazil, Russia, India and China—the so-called “BRIC” nations—garner the most attention. But there are good stocks in other, less populous corners of the globe, including South Korea, Mexico, Turkey, Saudi Arabia and South Africa. The options are numerous for investors willing to explore outside their American bubble.
Find out how investing in emerging markets can improve your portfolio
What do you need to know before you start investing in emerging markets? Because these companies are outside of the U.S. it’s important to invest carefully and strategically. Here are some of the factors we consider before we put money into these markets.
1. Investing in emerging markets comes with its fair share of risk. The term emerging is really a euphemism for “underdeveloped.” Many emerging markets are plagued by political instability, inferior infrastructure, volatile currencies and limited equity opportunities.
2. Risk and reward always walk hand in hand. Investing in emerging markets, like China, for example, puts you at risk of dealing with international issues like trade wars. That said, there are also huge opportunities for investors with a high risk tolerance (and a handy set of selling rules).
3. Fast growth equals fast growth. Where economies are growing fastest, earnings – and share prices – usually grow along with them.
4. There are many low-risk opportunities. You can find blue chips stocks in emerging markets, and many of them fly under the Wall Street radar, meaning there is great value to be found.
5. You can lower your risk by investing in ADRs. American Depository Receipts (ADRs) trade on U.S. exchanges, which subjects the stocks to strict U.S. requirements.
6. There is room to grow. The largest 50 companies in India have a combined market value that’s less than Amazon’s (AMZN). That gap is your opportunity.
7. Many emerging markets have younger populations. Consumers based in emerging markets tend to be much younger (China and Russia are exceptions) and are moving into the peak spending and investing periods of their lives. Think of them like American families in the early 20th century or coming out of World War II.
8. We live in a global world. Investing in emerging stocks just makes sense. While America’s economy is still larger than China’s and almost three times that of former rival Japan, we now live in a different, more global world due to incredible jumps in technology and communications.
9. You can still apply your investing rules. Move incrementally and buy emerging markets when they are down and out. Stick with high-quality companies showing good growth and strong balance sheets. Diversify across many countries and favor those that respect private capital, rule of law, and open markets.
10. Tech stocks. While many of the largest and most well-known tech stocks are in the U.S., there are major tech companies in emerging markets. And as a sector, tech continues to grow at a rapid rate.
Investing in emerging markets may take a little more research than investing in domestic companies, but there is ample opportunity for big gains.
What are your thoughts on investing in emerging markets? Is there too much risk, or do you find the opportunities irresistible? Share your thoughts in the comments.
[text_ad]